Philippe Jabre is the founder, chief investment officer and chief executive officer of Jabre Capital Partners, an independent wealth management company and multi-family office based in Geneva, Switzerland, that specialises in providing asset management services. This article will look at multi-currency portfolios, exploring the impact of currency movements on investment returns for international families.
For any investor who holds assets in a foreign currency, fluctuations in the value of that currency can impact investment returns. Currency hedging is a strategy implemented to manage currency exposure and the risks associated with owning foreign assets.
Also known as the forex or FX market, the foreign exchange market is a global marketplace for currency trading. With trillions of dollars traded on any given day, the forex market is vast. Operating across all time zones, it is open 24 hours a day, five days a week.
Anyone who has converted cash for a holiday abroad has had first-hand experience of the FX market. Market movements cause the value of currency to go up or down, with these currency fluctuations triggered by a variety of different factors. The forex market plays a vital role in the smooth operation of international trade, and some investors opt to trade currencies to manage risk or achieve a profit.
Various factors affect currency movements. Key reasons why a currency might rise or fall include:
- Political stability
- Economic strength
- Interest rates
- Inflation
These are just a few factors that can affect the perception of investors regarding a particular currency’s value. The key thing for anyone interested in forex trading to keep in mind is that where they purchase an asset denominated in a different currency, they are indirectly investing in that currency.
Take for example a UK investor purchasing shares in an American company listed on the New York Stock Exchange. That company will trade in US dollars. In this example, the value of their shareholding has increased by 20% when they decide to sell the shares two years later. Over the same timeframe, the value of the British pound has fallen by 10% against the US dollar. When they sell the US asset, they lock in a 20% gain, then convert the proceeds from dollars to sterling. Because the British pound is 10% weaker, their return is boosted by another 10%. However, it is crucial to keep in mind that the opposite could also be true if the currencies had moved in the other direction across that two-year timeframe.
Currency risk is the potential for investment performance to be impacted by currency movements. To manage a globally diversified portfolio effectively, it is crucial for asset managers to have a comprehensive understanding of currency exposure. Currency can contribute to the volatility of portfolio performance. In addition, it can also be an important means of diversification. Depending on the portfolio’s asset mix and overall risk, currency risk can be a significant detractor or contributor to portfolio returns.
Currency hedging strategies are prudent for those dealing with businesses internationally, lowering their chances of risk exposure and making it easier for investors to conduct business and invest across borders. It also helps safeguard their bottom line from market volatility. From the investor’s perspective, it is vital to select the right hedging strategy at the right time.
Due to the complexities involved in currency hedging, a thorough approach is crucial, including throughout assessments and strategic planning. Prior to diving in, investors must weigh up several key factors. By defining clear objectives, gaining a thorough grasp of market dynamics and evaluating their currency risk exposure, investors can develop a practical currency hedging strategy tailored to their timeline and investment goals.
Angela Spearman is a journalist at EzineMark who enjoys writing about the latest trending technology and business news.
