Investment Objective

Investing in overseas assets creates a currency risk exposure for the portfolio. A key decision is to determine an appropriate risk management/hedging strategy to either accept or mitigate the currency risk, which is reflected in the target or strategic hedge ratio. TGM’s Dynamic Currency Overlay adds value by dynamically adjusting the individual currency hedge ratios around the client’s target ratio based on currency forecasts while controlling for volatility.

Investment Strategy

TGM’s Dynamic Currency Overlay process uses proprietary quantitative models for forecasting currencies combined with volatility and momentum indicators to dynamically adjust currency hedge ratios relative to the client’s target hedge ratio levels, to generate additional risk adjusted returns.

TGM offers two approaches of its Dynamic Currency Overlay process. The first was developed in response to clients having bands set with target levels for the currency and once they are hit for a new hedge ratio to be implemented. The second is to use a proprietary optimisation procedure that results in more frequent incremental risk-adjusted changes in hedge ratios.

MSCI World in AUD 50% Hedged1 TGM Dynamic Currency Overlay (Bands)1 TGM Dynamic Currency Overlay (Optimiser)1
1 month -2.54% -2.23% -2.01%
3 months 5.60% 7.10% 7.10%
6 months 2.92% 1.72% 1.61%
1 year -14.78% -15.06% -17.65%
3 years (p.a.) 3.35% 3.83% 3.19%
5 years (p.a.) 6.48% 6.68% 5.51%
10 years (p.a.) 11.37% 11.64% 11.11%
Annualised Return2 7.55% 8.74% 8.17%
Annualised Volatility2 12.24% 12.27% 12.63%
Return/Risk Ratio2 0.62 0.71 0.65
WP Data Tables

For further information on how Dynamic Currency Hedging can benefit your fund please contact us here at TGM.

 The performance numbers are total returns in that they include both equity and currency return components. The returns are net of transaction costs but gross of management fees. Note that the performance numbers are based on out-of-sample currency forecasts from TGM’s dynamic currency overlay process.  

1 These are total returns in that they include the underlying equity market return (MSCI ACWI ex Australia Gross Return Index) plus the AUD currency hedge return. 

2 Return numbers are for the period April 2005 to December 2022.


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