Mortgage consultant

Just as corporations have to deal with “forecasting error” in terms of the deviation of forecast exchange rates relative to the actual future rate, so investors have to deal with tracking error within their portfolios, which is the return of the portfolio relative to the investment benchmark index being used. A portfolio manager can significantly affect the tracking error of their portfolio by the selection of the currency hedging benchmark. Empirically, it has been found that a 50% or symmetrical currency hedging benchmark generates around 70% of the tracking error of that generated by using a polar of 100% currency hedging benchmark. Put another way, the tracking error of a polar currency hedging benchmark is around 1.41 times that of a 50% hedged benchmark. The advantage of a symmetrical or 50% currency hedged benchmark for a portfolio manager is that it reduces tracking error and it also enables them to participate in both bull and bear currency markets.
Two popular types of active currency management strategy are the differential forward strategy and the trend-following strategy. Both of these strategies have consistently added alpha to a portfolio if followed rigorously and interestingly have also proven to be risk reducing compared to unhedged benchmarks. Thus, they also help to boost significantly the portfolio’s Sharpe ratio.