That Courage is not inconsistent with Caution: Foreign Currency Hedging for Superannuation Funds

Surveys of Australian superannuation funds verify that most international bond holdings, but not equity holdings, are hedged for currency risk. We compare the mean-variance efficiency of this practice with two alternative strategies: a conventional forward hedge; and a selective hedge triggered by the sign of the interest differential. These strategies produce optimal allocations which stochastically dominate the restricted portfolio according to Barrett-Donald (2003) tests. The advantages of alternative hedging strategies remain when the vector of sample mean returns is replaced by forecasts. Selective hedging works best for equities; conventional hedging for bonds. Adding unhedged bonds does not improve outcomescurrency hedging; portfolio allocation; stochastic dominance