Unrest stirs investor interest in hedges against currency risk

AT times like these - when army helicopters are on the roof, protesters are on the streets and some currencies are heading for the basement - investors naturally start to ask whether their mutual funds are hedged against currency risk.

The answer is likely to be no. Not many fund managers hedge currencies, principally because it is expensive to do so and, generally speaking, the more volatile the currency, the more costly the hedge.

'Over time, we believe the cost outweighs the benefit,' said Edmund Lacis, director of business development at the Hong Kong office of the world's largest fund house, Fidelity Investments.

'You could look at individual markets and say, 'Look what's happening in Indonesia or Thailand!' But it always comes up when currencies are going downward. As soon as we hedge it, the currency starts rising, and then people say, 'Why did you hedge it? You're lagging your peer group'.' Lagging the competition is deadly in the fund industry, so chances are slim of an industrywide move into hedged mutual-fund products. It is particularly unlikely in a place such as Hong Kong, where the investor pool is diverse and people come to the market with different base currencies and different risk-tolerances.

For example, an Asia-Pacific fund might stop being suitable for a sterling-based investor after it has been hedged into United States dollars. Or an Indonesian fund hedged to 12,000 rupiah per US dollar might not appeal to an investor who expects the Indonesian currency to weaken to 17,000 against the dollar.

Considerations such as these cause fund-management companies to offer plain-vanilla products. So, when choosing mutual funds, individuals should examine their needs and form their own views about where currencies and stock markets are headed.