11.12.2025, Dr. Luzius Neubert, Thomas Meier
Currency movements influence performance. For example, the slump in the US dollar by over 10% in the current year has significantly reduced the return on unhedged foreign currency investments for Swiss investors. Currency hedging is therefore a key issue. Investors who address it and implement it effectively can stabilise their portfolio without incurring high additional costs.
The strength of the Swiss franc – a problem?
Swiss investors with a globally diversified portfolio are affected by exchange rate developments, as they invest a substantial proportion of their assets in foreign currencies. [1]
Over the last five years, the Swiss franc has strengthened against the most important currencies. This has resulted in exchange rate losses on foreign currency investments.
For instance, the depreciation of the US dollar against the Swiss franc during the first nine months of 2025 resulted in an exchange rate loss of over 13% for unhedged USD investments. Conversely, the dollar’s appreciation against the franc (+7.7%) resulted in corresponding currency gains in 2024.
Exchange rates fluctuate and influence the performance of foreign currency investments. Depending on the direction of the exchange rate movement, investors may experience either currency gains or losses. Although exchange rate losses are usually offset in the long term by higher interest rates, exchange rate fluctuations do not generate an additional return (risk premium). To mitigate these risks, foreign currencies can be hedged against the Swiss franc.
[1] For a Swiss investor, the total return on a foreign currency investment results from the investment return in the foreign currency and the change in the exchange rate against the Swiss franc.
What is the long-term benefit of currency hedging?
Since 1970, a clear picture has emerged: From a risk perspective, currency hedging has proven its worth. In particular, the fluctuation risk of bonds was significantly reduced. At the same time, the returns on bond and equity investments with and without currency hedging were similar during the considered period.
Note: The time series are based on the Bloomberg Global Aggregate indices for foreign currency bonds and the MSCI World for foreign equities.
While currency hedging seems worthwhile in the long term, there can be significant differences in returns in the short and medium term. Therefore, a carefully selected and regularly reviewed hedging strategy is crucial.
Which asset classes do institutional investors hedge?
A peer group comparison of Swiss institutional investors shows how currency hedging is implemented in the investment strategy. [2]
The analysis shows that foreign currency risks are handled differently depending on the asset class. Foreign currency bonds are generally fully hedged. The average hedging ratio for equities in developed markets is at around 58%, whereas no hedging is usually undertaken for equities in emerging markets.
[2] The strategic hedging ratios of foreign currency bonds (including government and corporate bonds), global developed markets equities and emerging markets equities are taken into account in accordance with the annual reports as at 31.12.2024 of Swiss institutional investors. Each investor is given equal weighting.
How many foreign currency risks remain in the portfolio?
Currency hedging can also be considered at total assets level. A peer group analysis shows that Swiss institutional investors invest or hedge a large proportion of their assets in Swiss francs.
For investors with Swiss franc liabilities, hedging foreign currencies to a high degree is advantageous in order to reduce the effects of exchange rates between income (returns on investments) and expenses (e.g. pensions).
The Swiss franc often serves as a safe haven currency, appreciating in turbulent market phases. For Swiss investors, this leads to additional losses on foreign currency investments.
On average, unhedged foreign currencies account for approximately 16% of total assets. The mid 50% represent between approximately 10% and 21% of total assets.
It should be noted that the currency hedging ratio depends on the investor’s individual structure, risk capacity, and investment strategy. Depending on the current situation, various practical implementation approaches are available.
Practical issues
The first step in implementing currency hedging is to establish the level at which it should take place. Depending on the structure and complexity of the portfolio, there are three conceptual approaches. Each approach presents its own challenges and considerations that must be taken into account during implementation.
Firstly, hedging can take place directly within the funds. In this case, the fund provider assumes responsibility for hedging in line with the product definition.
- How does hedging affect costs and relative returns?
- What counterparty risks arise from hedging?
- What is actually being hedged, the portfolio or just the fund currency?
Secondly, a fixed hedging share can be defined at mandate level. In this case, the asset manager is tasked with ensuring the defined hedging throughout the entire mandate.
- Which asset classes and currencies should be hedged and to what extent?
- Which instruments should be used?
- Does the asset manager show a return before and after currency hedging?
- How is the asset manager’s performance assessed?
Thirdly, a central currency overlay can be implemented at total assets level. To this end, an overlay manager is tasked with hedging currency risks across all mandates in a targeted manner, thereby exploiting economies of scale.
- Which currencies should be hedged and to what extent?
- How is the overlay integrated into the overall strategy and how are responsibilities regulated?
- Is the overlay actively or passively managed?
- Which counterparties are involved?
- How is the effectiveness of the overlay measured and controlled?
