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The Case for Not Currency Hedging Foreign Equity Investments

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The Case for Not Currency Hedging Foreign Equity Investments

A U.S. Investor’s Perspective

GMO,

5 min read
5 take-aways
Audio & text

What's inside?

Over the long haul, currency hedging international equity investments can open up an ugly can of worms for American investors.

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Editorial Rating

9

Qualities

  • Innovative
  • Applicable

Recommendation

The strengthening of the US dollar has re-energized the debate about whether American investors should hedge currency exposures in their international investments so as to eliminate the impact of foreign exchange fluctuations on their portfolios. When it comes to equities, the answer for most investors is no, according to investment analyst Catherine LeGraw. Her authoritative white paper adroitly debunks some of the myths about currency hedging. getAbstract recommends it to US investors who want to understand the dynamics of global portfolios.

Summary

Globalization has muted the impact of currency movements on American investors’ international stock holdings, challenging long-held notions about the importance of hedging foreign exchange risk. Today, big companies with multicurrency cash flows typically derive less than 35% of their revenues from their home turfs, compared to 60% in 1992. Similarly, natural resources companies don’t need a hedge. They deal with commodities risk but not currency risk; the commodities they produce have a globally set price. Export-driven businesses often gain when their base currency falls, because their products become cheaper overseas...

About the Author

CFA charterholder Catherine LeGraw is a member of GMO’s Asset Allocation team. She has worked as an analyst at Bear, Stearns & Co. and as a director at BlackRock. She studied economics at the University of Pennsylvania.

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