Currency Hedging for Global Equities: Why a Full Hedge Does Not Necessarily Reduce Risk

• High cost, limited benefit: A full currency hedge currently does little to reduce the volatility of global equity portfolios, while costing around 1.4% a year.
• The optimal hedge changes over time: The hedge ratio that minimises risk is not constant. Since 2000, it has ranged from 22% to 100%, depending on market conditions.
• An efficient middle ground: Partial hedging can deliver much of the potential risk reduction while containing costs and preserving diversification benefits.

Many investors in global equities regard a full currency hedge as the safest option. A new study by Assenagon shows, however, that less currency risk does not automatically mean less portfolio risk. What matters is how equity and exchange rate movements interact. Under current market conditions, a full hedge entails substantial ongoing costs without meaningfully reducing overall portfolio volatility.

The years 2022 and 2025 illustrate how strongly currencies can affect returns. In 2025, the MSCI World gained 18.4% in local currency terms. Currency movements left an unhedged euro investor with a return of just 6.8%, while the hedged version returned 16.7%.

The picture was markedly different in 2022: the fully hedged index lost 17.7%, while US dollar appreciation limited the loss for an unhedged euro investor to 12.8%. In this case, the unhedged currency exposure cushioned the decline in equities.

“What matters is not how much a currency fluctuates in isolation, but how it behaves when equity markets come under pressure. If the US dollar appreciates during periods of stress, it can cushion losses in global equities. A full hedge would remove both the currency risk and that diversification benefit," says Sebastian Schmider, Head of AI Solutions & Macro Analytics at Assenagon.
 

Why a Full Hedge Does Not Minimise Portfolio Risk in Every Market Environment

The extent to which currency hedging reduces portfolio risk depends on market conditions. The risk-minimising hedge ratio describes the share of currency exposure that would need to be hedged to minimise volatility in the overall equity portfolio. Since 2000, this ratio has itself varied considerably, ranging from 22% to 100% across different market periods. Since 2022, it has stood at around 51%. Notably, fully hedged and unhedged portfolios have shown almost identical volatility of around 14%.

Investors should therefore consider carefully whether they need a full hedge, particularly as it does not necessarily minimise portfolio risk.
 

High Costs Call for a More Nuanced Approach

Hedge carry, driven mainly by interest rate differentials between currencies, was most recently negative at around 1.4% a year. Assuming unchanged interest rate differentials, increasing the hedge ratio from 50% to 100% would have cost approximately 0.7 percentage points in annual return. At the same time, under the market conditions prevailing since 2022, portfolio volatility would have risen slightly rather than fallen.

“A full hedge currently entails substantial ongoing costs without meaningfully reducing overall risk. Partial hedging may therefore be the more efficient approach: it limits currency risk while preserving some of the diversification benefit within a global equity portfolio," says Daniel Jakubowski, Head of Equity Portfolio Management at Assenagon.

What This Means for Investors

Investors should avoid treating a full hedge and entirely unhedged currency exposure as their only options. The key considerations are the cost of hedging and its actual contribution to overall portfolio risk. When hedging is expensive and equities and currencies are negatively correlated, partial hedging may make more economic sense, the two Assenagon investment experts conclude.

Read the full study in the latest issue of Assenagon Equity Insights.

Here you can download photos of Daniel Jakubowski and Sebastian Schmider.

Munich/Frankfurt, 1 October 2026