If a p.m. is neutral on currency directions, they would fully hedge? Stupid question this late in the game… thanks!
If they’re neutral wouldn’t they not hedge at all?
no. because having a neutral view would mean you don’t have an opinion one way or the other, you just want exposure to the stock or bond, not the currency.
By not hedging you have taken a viewpoint. This ties in with global attribution. If a manager has a large currency component or contribution, then they are more active in currency management or have done a terrible job of hedging (if they were supposedly neutral)
Saying you are currency neutral means that your portfolio’s expected return has zero correlation to changes in exchange rates. In equities, this can be very hard to implement in practice, because not only is there direct exposure to exchange rates if the stock is listed in a foreign currency, but the operating performance of a company can be influenced by exchange rates (even a company listed in the same currency) because of effects on company costs and competitiveness. (The indirect effects are captured by gammas in the ICAPM model).
Generally, currency neutral implies that you are expecting to recieve a company’s local market return +/- the exchange rate differential that you would pay/recieve in order to hedge out direct currency risk (indirect effects of currency risk on company profitability are not generally included).