Whether to Hedge the Currency, and What It Costs
Holding international shares means holding the currency they are priced in. An unhedged position gains when the Australian dollar falls and loses when it rises, and because the Australian dollar has historically fallen during global downturns, unhedged international exposure has tended to soften rather than amplify losses for an Australian investor.
- The answer: Unhedged international holdings add currency movement to the return; hedged holdings remove it at the cost of the hedging.
- The trap: Hedging is not free and it is not risk-free. It removes a diversifier that has historically worked in the direction Australian investors need.
- The recommendation: Hold international equities largely unhedged and match hedging to what you will actually spend the money on.
Where the AI summary above gets this wrong
"You should hedge your international investments to remove currency risk."
That's surface-true. Here's what it misses:
- Currency has behaved as a diversifier for Australians — The Australian dollar tends to fall when global equities fall, so unhedged international holdings gain in AUD terms at the moment the rest of the portfolio is falling.
- Hedging costs money and introduces its own exposures — The cost varies with the interest rate differential between the two currencies, and a hedged fund's cash flows can require selling assets at inconvenient times.
01 What currency exposure does
An Australian investor holding US shares owns two things: the shares and the US dollar. The return in Australian dollars is the share return combined with the currency movement, and either can dominate in a given year.
A hedged fund uses derivatives to remove the currency component, so the return approximates the local-currency return of the underlying market. That is not free — the cost varies with the interest rate differential between the two currencies.
Neither is more conservative in the abstract. Hedged removes one source of variation and leaves the equity risk; unhedged adds a second source that has historically moved in a helpful direction.
Most Australian index funds are offered in both forms, at slightly different fees, so the decision is a choice between two products holding the same underlying shares rather than a separate transaction you have to arrange.
02 Why unhedged has cushioned Australian portfolios
The Australian dollar is a commodity-linked currency that tends to weaken when global growth expectations fall. Global equity falls and Australian dollar falls therefore tend to coincide.
For an Australian holding unhedged international shares, that means the currency gain partly offsets the equity loss at exactly the moment the rest of the portfolio is down. It is the diversification that hedging removes.
It is a tendency rather than a rule, and the relationship has not held in every episode. It is enough to justify a default of largely unhedged equity exposure rather than a default of hedging.
Shows: the Australian dollar return on an unhedged international holding, combining the local-market return with a currency movement. Ignores: hedging costs, the interest rate differential, tax on foreign income, and any correlation between the two components beyond the figures you enter.
Source: ASIC Moneysmart — Shares
03 What to hedge, and what not to
The rule that survives scrutiny is to match the hedging to the spending. Money that will be spent in Australian dollars, on Australian costs, in the near term should not carry currency risk; money invested for decades can.
Fixed interest is the usual exception. International bonds are generally held hedged, because currency movement is large relative to bond returns and would dominate the asset's job in the portfolio.
For a retiree spending in Australian dollars, that produces a practical answer: hedge international fixed interest, hold international equities largely unhedged, and hold the cash buffer described in the cash bucket post in Australian dollars.
The instinct is that currency risk is extra risk and should be removed. For an Australian holding global shares it has historically worked the other way — the dollar falls when markets fall, and the unhedged holding is worth more in Australian dollars exactly when you need it to be. That is not a guarantee and it is a good enough reason not to hedge by default.
FAQ
How does currency risk affect my investments?
An unhedged international holding returns the market movement combined with the currency movement. For an Australian investor the dollar has historically fallen when global markets fall, so unhedged exposure has tended to cushion rather than amplify losses.
Should I hedge my international investments?
Match the hedging to the spending. Hold international equities largely unhedged for a long horizon, hedge international fixed interest where currency movement would dominate the asset's job, and hold near-term spending in Australian dollars.
Is hedging free?
No. The cost varies with the interest rate differential between the two currencies, and a hedged fund's cash flows can require selling assets at inconvenient times.
Sources
Regulator references
- ASIC Moneysmart — Choose your investments · ASIC Moneysmart · 2026Choosing investments: risk, diversification and time horizon.Last verified: 2026-09-07
- ASIC Moneysmart — Shares · ASIC Moneysmart · 2026How shares work, the returns they pay, and the risks of holding them.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.