Currency hedging

Currency hedging (also known as FX hedging) protects investments denominated in foreign currencies from exchange rate losses, but it also prevents any potential currency gains.

Hedging offsets the interest rate differential between the two currencies. Example: USD interest rate 3.5 percent, CHF interest rate 0 percent → Hedging the U.S. dollar against the Swiss franc is relatively expensive. The cost of hedging effectively corresponds to the interest rate differential of 3.5 percent per year.

The effect on investing is that you receive nearly the same return as an investment in local currency (for example, the S&P 500 in CHF). The currency effect is largely eliminated, so the total return fluctuates less from the investor’s perspective. In other words, FX hedging trades exchange rate risk for interest rate differential costs.

In the context of risk profiling, partial currency hedging can allow investors to take on more risk elsewhere, for example through a higher equity allocation.

In this video podcast, CEO Felix Niederer explains how True Wealth uses currency hedging and how this can be beneficial.