GLOBAL MARKETS IN FOCUS: OPPORTUNITIES & RISKS
Do You Hedge Foreign Currency? By Erin D. Greenfield, CFA
I believe in investing globally because it increases opportunities and permits better diversification. That said, global investing comes with risks, including foreign currency fluctuations.
popular among US institutional investors. Cheema-Fox and Greenwood found only 21 percent of USD-based institutional equity investors hedge their foreign currency exposure, and those investors only hedge 35 percent of their exposure. 1
In the short term, foreign currency fluctuations can materially impact reported investment performance, both positively and negatively. Clients rarely ask about this impact when it is positive. However, it can be concerning for them when the impact is negative, which happens when the Canadian dollar appreciates.
So, currency hedging is not popular in the US, and, in my opinion, it should be even less popular in Canada. Why? Because for investors in countries with smaller economies such as ours, hedging can actually increase risk. When Americans hedge foreign currency, they increase their exposure to the US dollar, the world’s most important currency, often referred to as the world’s “reserve currency.” On the other hand, when Canadians hedge currency, they are increasing their exposure to our Canadian dollar, and therefore to our relatively small, undiversified economy.
currencies such as USD, EUR, GBP, HKD, etc. is more than 75 percent of our equity portfolios at present. Why does our firm not hedge foreign currency risk arising from our equity positions? Below are four reasons.
1. Hedging reduces diversification Despite the risk, our firm generally does not hedge the foreign currency exposure arising from our equity investments even though our combined exposure to foreign
Much of the concept and study of hedging foreign currency risk comes from the US. Despite this, currency hedging is not
Some may ask, “But all my retirement expenses will be in Canadian dollars, so shouldn’t I have all my assets and income based in Canadian dollars?” The simple answer is “No.”
Some may ask, “But all my retirement expenses will be in Canadian dollars, so shouldn’t I have all my assets and income based in Canadian dollars?” The simple answer is “No.”
Purchasing Power Parity relative to Canadian Dollar (26 May 2025)
While retirement expenses will be denominated in Canadian dollars, the items purchased and consumed will be priced off international markets. Your coffee might come from Brazil, your pasta might contain European wheat, your fuel might come from American refineries, your clothes might be made from cotton grown in India, your vehicle might contain Japanese steel, the shows you watch might be produced in the US, the plastics around your home might be from China, your bananas might be from Costa Rica, you might take a cruise to Argentina, and your purse might be made from Italian leather. The chances of being able to afford global goods is better if your assets are spread across important global currencies than if you take a gamble putting everything into our loonie. In other words, diversification away from the Canadian dollar should insulate purchasing power.
Swiss Franc Icelandic Krona Israeli Shekel US Dollar Danish Krone British Pound Australian Dollar Swedish Krone Norwegian Krone New Zealand Dollar European Euro Japanese Yen Korean Won Czech Koruna Polish Zloty Mexican Peso Hungarian Forint South African Rand Russian Ruble Turkish Lira
+38%
+18%
+29%
+17%
+9%
+6%
+6%
+5%
+3%
−31%
−22%
−12%
+3%
−33%
−41%
−41%
−44%
−52%
−79%
−61%
−80 −70 −60 −50 −40 −30 −20 −10 0 10 20 30 Under−Valuation (−) / Over−Valuation (+) of Currency
40
Source: OECD, Pacific Exchange Rate Service. PPP Base Year: 2023. Diagram: Prof. W. Antweiler, University of British Columbia.
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