Warning 'misconceptions' of currency hedging next industry scandal

Industry commentators have warned the majority of advisers and wealth managers have failed to hedge their foreign currency holdings into sterling, meaning a rally in the pound could wipe out returns.

In a further warning, they said unknowing investors in safe-haven assets such as global bond funds will be hardest hit by a sterling rally, as bonds are most affected by currency movements.

In 2016, investors in foreign assets benefitted from a sterling windfall following the collapse in the currency after the UK voted to leave the European Union (EU). The pound plummeted 16.5% against the dollar to as low as $1.149 during that year, fuelling the rise of foreign equity holdings and large-cap UK stocks.

However, according to Christopher Peel, CIO of Tavistock Wealth, this trend is set to reverse after the UK leaves the EU next year, even if the Withdrawal Agreement is rejected and the UK moves towards a no-deal scenario.

We systematically hedge safe assets such as government and corporate bonds, but we do not tend to hedge equities as most of the equity risk comes from equity volatility – Sleep