In our first Topic of Interest paper of a three-part series on currency, The Cost of Not Hedging Foreign Currency, we outlined the risks involved with currency exposure embedded in international assets, and how a fixed hedge can be an important first step in managing those risks. While hedging currency may be a good starting point, a different approach for investors who want to retain currency exposure is to change the nature of the exposure itself. In our second paper, A Different Approach to Currency Investing, we introduce how this can be accomplished by using currency beta.
- Currency beta can be thought of as a factor-based benchmark that better describes the nature of the currency market as a whole.
- Typical currency beta benchmarks gain exposure to traditional factors, including value, carry and momentum.
- We believe currency beta may provide an improvement upon the commonly used embedded currency exposure – or the “unhedged” element of most portfolios.
To review the first Topic of Interest paper in the series, The Cost of Not Hedging Foreign Currency, click here.