This article investigates whether structurally hedging the currency risk of global equity products benefits long-term investors. Based on a 35-year backtest of three smart beta strategies from six currency perspectives, the answer is a qualified yes. Currency hedging was effective in reducing risk and generally improved medium- to long-term Sharpe ratios, albeit at a small cost to average returns. It may not be the proverbial free lunch, but it does appear to be a value meal from the risk-adjusted perspective that is most relevant in an asset allocation context. The most effective hedging strategy and the resultant benefits varied by investor domicile, the nature of the equity holdings, and over time. The benefits were strongest for defensive (low-volatility, noncyclical) equity portfolios for investors from safe-haven currency zones and least pronounced for cyclical equities held by investors using procyclical currencies. For example, contrary to common belief, Australian and Canadian investors may yet gain from currency hedging, at least for some global equity strategies. Particularly since the global financial crisis, being smart about how much of a portfolio’s currency exposures to hedge has been key to avoiding perverse impacts.
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