Currency Overlays Can Add Value

Abstract

Investments made in foreign equities and other asset classes have currency risk. The currency risk can be substantial since changes in currency rates can increase, reduce, or even wipe out underlying investment returns. Fortunately, currency risk can be managed effectively. The optimal solution is a currency overlay program dedicated to manage a portfolio of currency hedges that reduces the risk of currency losses while retaining the opportunity to participate in currency gains. Pension consultants have found that currency overlay managers reduce currency losses and can add value over time, while prudent investment practices require investors with fiduciary responsibilities to assess all currency risks, and how to manage them, to avoid unnecessary losses. Initiating a currency overlay program entails separating all currency hedging decisions from the underlying investment decisions.