‘That Courage is not Inconsistent with Caution’: Currency Hedging for Superannuation Funds

Susan Thorp

The Economic Record, 2005, vol. 81, issue 252, 38-50

Abstract: Surveys of Australian retirement savings funds verify that most international bond holdings, but not equity holdings, have been hedged for currency risk. We compare the mean–variance efficiency of this practice with two alternatives: a conventional forward hedge and a selective hedge triggered by the sign of the interest differential. These strategies generate optimal allocations that stochastically dominate restricted equity hedging according to Barrett–Donald tests. Advantages of alternative hedging strategies remain when sample mean returns are replaced by forecasts. Selective hedging works best for equities; conventional hedging for bonds. Adding unhedged bonds does not improve outcomes.

Date: 2005
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