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February 15th, 2019

Currency Hedging in Emerging Markets: Does it Reduce Risk?

By Scott Treacy, CFA

Given the volatility in emerging markets equity, do managers utilize currency hedging to actively lower the risk in their portfolios?

The analysis.

To answer this question, we first had to analyze how managers in the universe approach hedging using data from the Investment Metrics platform.

We assigned the products into four categories:

  1. Active Hedging
  2. Defensive Hedging
  3. Implicit Hedging (part of both the country allocation and security selection process)
  4. No Hedging

 

Emerging Markets Currency Hedging Analysis

Although there are few managers in the universe with the skill set to actively hedge away the risk in their portfolios, roughly a third of the products utilize some form of currency hedging (if we include those that will defensively hedge.)

The result.

To answer the original question, “Does currency hedging reduce risk?”

Currency Hedging in Emerging Markets Risk/Return Analysis

We found that over the past five years, ending December 2018, all active and defensively hedged products have reduced the overall risk of their portfolios. While they have reduced overall risk, they have also underperformed managers that do not currency hedge.

This is just one example of a research piece our in-house team of experts provides our clients. Interested in learning more about our research capabilities? Request a demo of the Investment Metrics platform.


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