Currency Hedging for Hedge Funds Debunked - Report

Stephen Harris

13 February 2006

Investors should not hedge currency over the long term because it “all comes out in the wash”, according to a new research published by ABN Amro and the London Business School in the Global Investment Returns Yearbook 2005. Although currency hedging is easier now than it ever has been, the benefits are outweighed by the cost and anyway compares unfavourably to the reducing of portfolio volatility by diversifying across countries, asset classes, as well as currencies, says the study. “Currency risk does not add greatly to he long-run risks of international equity investment. Investors with no special insights about the prospects for different world markets should therefore hold as diversified portfolio as possible. “For longer term investors, however, foreign exchange hedging mitigates downside risk by no more than a small margin,” say the researchers Elroy Dimson, Paul Marsh and Mike Staunton who used a database to examine the benefits hedging currency exposure over the last 106 years