GLOSSARY TERM
Hedged vs Unhedged
Hedged and unhedged describe whether an investment tries to reduce the effect of currency movements or leaves that currency risk in place.
What does this mean in practice?
If you invest in foreign assets, your return is affected not only by the investment itself, but also by exchange rates. A hedged fund tries to reduce this currency effect, so returns are closer to the performance of the underlying investments. An unhedged fund does not do this, so currency movements can increase or reduce your return. Hedging can make returns more stable in your home currency, but it usually also adds some cost.
Example
A euro investor buys a US bond ETF. If it is hedged, changes in the dollar have less effect on the return in euros. If it is unhedged, a weaker dollar can lower the euro return even if the bonds perform well.
Why it matters
This helps you understand why two similar funds can produce different results. For long-term investors, unhedged equity funds are often accepted as normal, while hedging is more commonly considered with bond funds where stability matters more.
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