Currency hedging for Australians

Two things can move at once

Imagine you own an overseas investment and its price goes up in US dollars. That doesn’t always mean it’s worth more in Australian dollars. Exchange rates can help or hurt your result. Currency hedging is one way some funds try to reduce those currency swings.

What hedging tries to do

A currency-hedged fund uses arrangements intended to reduce a selected currency exposure. Hedging has costs, can behave imperfectly, and does not remove the risk of the underlying shares.

There is no universal answer

How much currency exposure someone wants depends on their goals, other assets and comfort with fluctuations. Australian-listed does not necessarily mean Australian-currency-only exposure.

A simple Australian-dollar example

Imagine an overseas investment is worth US$100. At an exchange rate of US$0.70 per A$1, that's about A$142.86. If its US-dollar price stays the same but the Australian dollar strengthens to US$0.80, the holding translates to A$125. You haven't lost US-dollar value, but your Australian-dollar value has dropped. If the Australian dollar weakens, the effect can go the other way.

Currency hedging aims to reduce some exchange-rate movements. It can involve costs, imperfect results and, depending on the product, tax and other differences. It won't stop the underlying shares or bonds falling.

How to decide what to investigate

1. Check whether the fund holds overseas assets and whether its returns are shown in Australian dollars.
2. Find out if it is hedged, unhedged or a mix, using the fund's official documents.
3. Think about when you'll need the money and what currency you'll spend it in.
4. Compare fees and understand how hedging might change your experience during a falling or rising Australian dollar.

Currency exposure is only one part of an investment. It shouldn't distract you from checking what the fund holds and how much risk it takes.