I believe in investing globally because it increases opportunities and permits better diversification. That said, global investing comes with risks, including foreign currency fluctuations.

In the short term, foreign currency fluctuations can materially impact reported investment performance, both positively and negatively. Clients rarely ask about this impact when it is positive. However, it can be concerning for them when the impact is negative, which happens when the Canadian dollar appreciates.

Despite the risk, our firm generally does not hedge the foreign currency exposure arising from our equity investments even though our combined exposure to foreign currencies such as USD, EUR, GBP, HKD, etc. is more than 75 percent of our equity portfolios at present.

Why does our firm not hedge foreign currency risk arising from our equity positions? Below are four reasons.

Some may ask, “But all my retirement expenses will be in Canadian dollars, so shouldn’t I have all my assets and income based in Canadian dollars?” The simple answer is “No.”

1. Hedging reduces diversification
Much of the concept and study of hedging foreign currency risk comes from the US. Despite this, currency hedging is not popular among US institutional investors. Cheema-Fox and Greenwood found only 21 percent of USD-based institutional equity investors hedge their foreign currency exposure, and those investors only hedge 35 percent of their exposure. ¹