Pictet Asset Management’s, Head of Fixed Income Investment Strategy & Solutions, Mickael Benhaim explains why fixed income investors may want to consider hedging their currency risk:

“Investing overseas means investing in a foreign currency too, which can make life a little more complicated, particularly for bond investors. Allocation to overseas assets opens a world of investment opportunities that are unavailable at home. It also makes a portfolio more resilient by diversifying risks. But it comes with additional complications because on top of the underlying asset, investors also buy into the currency in which an international security is denominated.”

“And currencies are tricky beasts – because they can be volatile and unpredictable. They have the potential to influence portfolio returns, sometimes positively, sometimes negatively. Furthermore, currency moves this year have been of the sort that happen once in a generation. The yen, for example, lost a fifth of its value against the dollar to hit a 32-year low, while sterling slumped to a 37-year trough against the greenback. The euro fared better in comparison, but still fell to its weakest in 20 years against the US currency. This means for US-based investors, any gains in the underlying fixed income assets would have been easily wiped out by foreign exchange moves if they did not hedge their currency risks.”