Global asset management

Currency risk is low in the long term, as exchange rates tend to revert to fundamentals over the very long run, but the contribution of currencies to the longterm performance of a global portfolio never gets to be nil. Currency risk premiums exist in the long run and are consistent with world market equilibrium and finance theory. The author argues that if the plan sponsor sets a benchmark for a very long-term horizon (say, fifty years), it should probably be unhedged as currency returns provide only a small, positive or negative, contribution to total return, while systematic currency hedging is a cumbersome process. If the plan sponsor has in mind a shorter strategic horizon (say, five years), the ideal currency allocation in the strategic benchmark is, and will remain, a question open to debate. Applying some universal hedging rule is questionable in the presence of the complex,correlation structure of stock prices, interest rates, and exchange rates. Finally, the author explains that if the plan sponsor believes in active management, currencies should be an integral part of the tactical asset allocation and security valuation process.