Implementation Solutions

Currency overlay

Does currency matter?

International investors receive a return consisting of the gain or loss of the foreign security plus the return on the currency used to purchase the security. Currency volatility can be significant, and the return from the currency can sometimes swamp the gain or loss on the foreign security.

What is currency hedging?

Currency hedging is eliminating some or all of the foreign exchange volatility from holding international assets. An investor would hedge by selling foreign currencies that are implicitly included in an international portfolio and buying their domestic or base currency. Passive hedging involves selecting and then maintaining a hedge ratio. The hedge ratio represents the percentage of international assets selected for hedging. For example, if an investor has a $1,000,000 international equity portfolio and shields half of the equities from currency effects, the ratio is 50%. The ratio can vary from 0% (no hedging) to 100% (all assets are hedged).

How would Russell Investments' currency hedging program work?

We will:

  • Work with you to decide on the features of the program (for example, the frequency of rebalancing the hedge)
  • Gather portfolio information from your custodian
  • Calculate the amount to hedge for each currency
  • Manage trading and settlement
  • Report monthly on the effectiveness of the hedge