Currency Hedging Performance Analysis and Framework

This document is a technical report that analyzes the performance of currency hedging in the context of international equity investments, specifically focusing on the MSCI EAFE Index. It reviews the historical performance of currency hedged versus unhedged indices over the past decade, highlighting that the MSCI EAFE Currency Hedged Index has outperformed the unhedged counterpart, returning 140% compared to 74%. The report attributes this outperformance to the strengthening of the US Dollar and favorable currency carry. It also discusses the volatility associated with both hedged and unhedged investments, noting that hedged investments have exhibited lower volatility. Furthermore, the report outlines a currency hedging framework consisting of four components: currency spot return, currency carry, volatility of local equity and currency, and correlation between local equity and currency. The analysis emphasizes the importance of understanding these factors for making informed currency hedging decisions in the future.