Global Asset Management

Abstract

Management in France. n d the early nineties, most of the largest investors in the world, such as U.S. and U.K. pension funds, did not currencyU hedge their international portfolios. Several explanations can be found for this policy. International assets, mostly stocks, represented only a tiny portion of the global portfolio of U.S. pension funds; the impact of currency risk was thus very limited, and even beneficial, as it provided an element of &versification for domestic monetary risks. In terms of return, the U.S. dollar and U.K. pound were weak currencies in the seventies and eighties, so holding strong currencies such as the yen or the deutschemark provided additional return to the international portfolio. Finally, most investors &d not feel at ease with derivatives, or were even precluded from using them. Why then go through the burden of a systematic hedging policy when currencies did not add risks to the global portfolio and contributed positively to its performance? The picture has recently changed. Both the U.S. dollar and the U.K. pound have been strong currencies relative to the yen or to other European currencies. In the U.K., where pension funds have traditionally devoted a significant proportion of their assets to foreign stocks, pension regulations have changed, leading to an increased focus on volatdity. In the US., pension funds have drastically increased the proportion of their international assets (up to more than 20% of the total fund for some of them), so that currency risk can no longer be treated as a negligible component. All ths is lea&ng