Currency Hedging: A Free Lunch?

Apr 1, 2009

This Research Insight examines the question of whether currency hedging is a ‘free lunch' of risk reduction and zero expected returns. Using a long history of hedged and unhedged MSCI indices, we find that hedging does not always reduce risk, nor are mean returns zero. Contrary to some prior studies, we find there is no free lunch for the equity investor. Instead, we conclude that the usual, intuitive relationships hold: less risk usually means lower returns, and more risk, higher returns. Our research indicates that whether  hedging pays off depends not only on the base currency, market, and hedging horizon, but also on the investor's goals of risk reduction or return/risk maximization.