Reading 42 GPE Currency Hedged Benchmark

Vol 6, Page 237 last paragraph states that a client could assign to an asset manager a benchmark that is fully hedged against currency risk if client decides to delegate currency management to a separate overlay manager.

If the asset manager then retains exposure to curency risk (because that risk is managed separately by another manager), wouldnt the asset manager’s appropriate benchmark be one that is not currency hedged i.e. contrary to what is stated above?


The overlay manager’s job is to provide the appropriate currency hedge and he will be evaluated towards that purpose.

For the asset manager - he would not worry about the currency part of the portfolio. Assuming the hedge works fine (which is not what he is evaluated against) the fully hedged benchmark should be the right one to use.

thank you cpk.

however, it appears to be an inconsistent comparison : asset manager’s performance (unhedged) vs benchmark (hedged). sure, one could “plug in” a perfect currency hedge component into the manager’s unhedged returns, however that seems to be a convoluted way of doing things as opposed to simply comparing against an unhedged benchmark for the sake of consistency.

From what is written over there - it seems to be a client’s choice.

They either do not like currency risk (so no hedging), assign the task to a currency overlay manager and benchmark against fully hedged benchmark, or use a arbitrary hedge ratio between 0 and 1.

Even with a fully hedged benchmark - the currency dimension should NOT BE IGNORED - since the impact is quite big.

I thought that it was up to the investment management firm to decide the best route , separate manager for overlay , or operate currency hedge within the strategy . The appropriate benchmark presented to the customer would still be the fully hedged , because that is a minimum expected performance to the client