What is Currency Hedging?
Currency hedging is the practice of removing the impact of NZD/foreign-currency exchange rate movements from a KiwiSaver scheme fund's offshore returns.
Detailed Explanation
A KiwiSaver scheme fund holding US shares earns returns in USD. Without hedging, NZD/USD moves change the NZ-dollar value of those returns. Hedging uses forward contracts to lock in the exchange rate. Fully hedged, partially hedged, and unhedged are all common; the decision is set in the SIPO.
Example
A global shares fund returns +10% in USD. With NZD strengthening 5% against USD, an unhedged fund returns about +5% in NZD; a fully hedged fund returns about +10% in NZD (less hedging cost).
Frequently Asked Questions
Should I prefer hedged or unhedged?
It depends on time horizon and conviction on currency direction. Many balanced funds use a partial hedge to smooth outcomes.