News & Insights

2024 Q3 Commentary - Sound as a pound

04 November 2024, Graham Harrison

Sound as a pound

In this article, we examine the impact of FX hedging strategies on portfolio performance for investors, questioning the efficacy of systematic hedging in reducing downside risk.

We also address the drawbacks of an overweight allocation to UK equities, suggesting that tactical, flexible hedging may offer a more effective approach to managing currency risk and enhancing returns.

Key Takeaways

  • Systematic FX Hedging Ineffectiveness: Empirical evidence indicates that systematic hedging of foreign equity exposure fails to reduce downside volatility for Sterling investors. This aligns with findings that such hedging strategies often increase risk rather than mitigate it during global market downturns.
  • Limited Benefits of Domestic Bias: Maintaining an overweight in UK equities provides minimal long-term advantage, particularly as UK equities have underperformed compared to global benchmarks. A more globally diversified approach may enhance portfolio resilience and returns.
  • Value of Tactical Hedging: Tactical FX hedging can add value, but portfolios that systematically hedge global equity exposure or lean heavily towards domestic equities have typically shown the weakest performance over the past 20 years. This suggests that a flexible, market-responsive approach to hedging may yield better outcomes than rigid hedging strategies​.
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