Managing Currency Exposure in Multi-Asset Portfolios

This technical report discusses strategies for managing currency exposure within multi-asset portfolios. It presents two frameworks that assist asset owners in evaluating various currency management approaches. The first framework assesses trade-offs across three dimensions: investment complexity, operational complexity, and decision frequency. Different approaches include fully hedged, fully unhedged, asset class-based, optimal hedge ratio, risk-premia harvesting, and active management. The second framework categorizes currencies based on their characteristics, particularly focusing on foreign equity allocations. The report emphasizes that currency exposure can significantly impact foreign fixed income investments and advocates for a hedging strategy. It also discusses the costs associated with hedging, including the interest-rate differential between currencies. Additionally, the report outlines how base currencies can be grouped to simplify the currency management process for equities, based on their volatility and correlation with foreign equity returns.