• This paper seeks to rethink common industry practices around currency hedging and currency exposure for global multi-asset portfolios.
  • For most institutional investors with multi-asset portfolios, currency exposures are often a by-product of static, “rule of thumb” hedging rules.
  • This approach, however, constrains potential currency exposure due to arbitrary tilts such as the regional market capitalization of underlying asset classes. It fails to exploit the potential return and risk diversification benefits of currencies.
  • We considered this an opportunity to improve portfolio efficiency by seeking to treat currency as its own asset class in the broader portfolio construction problem.
  • Using our proprietary currency valuation model to estimate ex ante currency return expectations, we were able to increase returns on our hypothetical global 60/40 portfolios over our sample period while controlling for overall portfolio risk, equity beta and currency exposure tolerance, compared with traditional hedging practices.
  • These potential performance gains could be meaningful in their own right but have the potential to be particularly significant in today’s low yield environment.

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The Author

Josh Davis

Portfolio Manager, Head of Client Analytics

Helen Guo

Quantitative Research Analyst, Client Solutions and Analytics

Aaditya Thakur

Portfolio Manager, Australia and Global

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Disclosures

Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Investors should consult their investment professional prior to making an investment decision.

This paper contains hypothetical analysis. Results shown may not be attained and should not be construed as the only possibilities that exist. The analysis reflected in this information is based upon data at time of analysis. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.

Hypothetical and simulated examples have many inherent limitations and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated results and the actual results. There are numerous factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results. No guarantee is being made that the stated results will be achieved.

Return assumptions are for illustrative purposes only and are not a prediction or a projection of return. Return assumption is an estimate of what investments may earn on average over the long term. Actual returns may be higher or lower than those shown and may vary substantially over shorter time periods.

Figures are provided for illustrative purposes and are not indicative of the past or future performance of any PIMCO product. It is not possible to invest directly in an unmanaged index.

This material contains the current opinions of the manager and such opinions are subject to change without notice. This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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