Currency hedging

Currency hedging (also known as FX hedging) protects investments in foreign currencies against exchange rate losses, but also prevents currency gains.

Hedging offsets the interest rate difference between the two currencies. Example: USD interest rate 3.5 percent, CHF interest rate 0 percent → Hedging the US dollar against the Swiss franc is relatively expensive. The cost of hedging is effectively equal to the interest rate differential of 3.5 percent p.a.

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

In the context of risk profiling, partial currency hedging can mean that investors can take on more risk elsewhere, for example, by increasing their equity allocation.

In the following video, CEO Felix Niederer explains how True Wealth uses currency hedging and how it can be worthwhile:

https://www.truewealth.ch/blog/improve-your-long-term-returns-with-currency-hedging