Currency-Hedged vs. UnhedgedMedium

Hedging removes a risk and adds a cost, and which one dominates depends entirely on the asset. The answer is different for bonds and equities, and that is not a matter of opinion.

5 min read · 812 words · Updated 4 Sep 2026

What hedging actually does

• A hedged share class sells the foreign currency forward, usually monthly, in the amount of the fund's foreign exposure. When the currency moves, the forward contract offsets it.
• The cost is the interest-rate differential, not a fee. Covered interest parity fixes it: hedging a currency whose rates are higher than yours costs you roughly that difference every year, and hedging a lower-rate currency pays you.
• Plus the cross-currency basis, which is a real and sometimes large additional term — the hedged-yield calculator computes all of it.
• It is not free and it is not a fee. It is the price of removing a risk, set by rate markets rather than by the fund provider.

Bonds: hedging almost always makes sense

• The reason is proportion. A foreign government bond might have 5% annual volatility; the currency has 8–10%. Unhedged, the currency is not a side effect — it is the majority of the risk, and it swamps the thing you bought the bond for.
• The bond was bought for a known, modest return. Adding an unrelated risk twice its size defeats the purpose entirely.
• The hedge cost is not a loss. It approximately equals the difference in short rates, which is roughly the difference in the two bond markets' yields. Hedging a high-yielding foreign bond back typically leaves you near your domestic yield — which is the point: you were not being offered free extra yield.
• The pick-up, when it exists, comes from the basis and curve shape, not from the yield difference. It is real, it is measurable, and it is a fraction of the headline gap.

Equities: the case is genuinely open

• Equity volatility is 15–20%, currency 8–10%, and they are not perfectly correlated — so hedging removes proportionally much less of the total risk than it does for bonds.
• The natural-hedge argument is real but weaker than claimed. A company's earnings currency and its share price's currency behaviour are related, not identical.
• The reasonable conclusion: for equities this is a genuine judgement call with defensible answers on both sides, and anyone stating it as obvious in either direction has stopped reading early.

What a hedged share class does not do

• It does not hedge continuously. Hedges are struck on a schedule, usually monthly, in the amount of the exposure at that moment. Between resets, market moves leave the hedge over- or under-sized.
• It does not hedge the underlying revenue exposure — only the currency of the assets. A hedged fund of European shares still owns companies earning dollars.
• It does not remove the cost when rates move against you. The cost is whatever the differential becomes, and it can change substantially within a year.
• It does not come free of tracking noise. Hedged classes have a small additional tracking error from the reset mechanics, visible in the tracking difference.

The framing that resolves most of it

• What currency are your liabilities in? If you will spend in euros, euro-denominated outcomes are what matter, and everything else is a translation risk you are choosing to hold.
• What proportion of the position's risk is currency? Above roughly half — the bond case — hedging is close to a structural requirement. Well below — the equity case — it is a preference.
• Can you tolerate the cost being certain and the benefit uncertain? That asymmetry is what makes people abandon hedges at the worst time.
• Are you hedging or predicting? Hedging is removing an exposure. Choosing to hedge sometimes is a currency view, and should be labelled as one.

The checklist

• Which risk dominates — check the asset's volatility against the currency's with the volatility converter.
• What does the hedge cost at today's rate differential, and what if that differential doubles?
• Is the share class hedged, or just denominated in your currency? These are different things with confusingly similar names, and only one of them hedges anything.
• Does the ongoing charge differ between the hedged and unhedged classes?
• Will you keep the hedge through the year in which it costs you visibly? A hedge abandoned mid-way is the worst of both.