Hedged vs Unhedged International Funds: What’s the Difference?

When Australian investors look beyond our domestic share and bond markets and invest internationally, they gain access to a broader range of industries, investments, income and growth opportunities.

However, investing overseas introduces an additional factor that does not exist when investing in Australian markets: Currency movements.

This is where the distinction between ‘unhedged’ and ‘hedged’ international investments becomes important.

Table of Contents 

What is an Unhedged fund?
How do Unhedged funds work?
What are the risks and benefits of Unhedged funds? 
What is a Hedged fund?
How do Hedged funds work?
What are the risks and benefits of Hedged funds?
Hedged or Unhedged: which is better?
How do I chose between Hedged and Unhedged funds?
International Fixed Interest: Hedged or Unhedged? 
Summary: hedged vs unhedged funds for Australian investors

What is an Unhedged fund?

Unhedged international share investments (including Australian-based managed funds or ETFs investing in international shares on an unhedged basis) provide exposure to two key drivers of risk and return:

1. Performance of the overseas share market(s); and
2. Changes in foreign currency exchange rates relative to the Australian Dollar (AUD).

In other words, with an unhedged fund you are investing in both:

• The underlying international shares; and

• The relevant foreign currencies. 

How do Unhedged funds work?

For example, if you invest in a fund that invests in US shares on an unhedged basis, your return will be influenced by:

• How US shares perform; and

• How the Australian dollar moves against the US dollar (USD). 

Meaning:

• If the AUD falls in value relative to the USD, the value of your overseas investment generally increases when converted back to AUD.

• If the AUD rises relative to the USD, this currency movement can reduce your returns in Australian dollars. 

This means unhedged investments can add both opportunity and risk to a portfolio.

What are the risks and benefits of Unhedged funds? 

• Potential for higher returns if the AUD weakens against foreign currencies.

• Additional volatility because returns move with both share markets and exchange rates.

• In some environments, unhedged exposure can help cushion falls. For example, when global equity markets fall and the Australian dollar also weakens, the lower AUD can partially offset declines in international markets, so an unhedged portfolio may experience smaller losses than a fully hedged portfolio.

Unhedged funds may suit investors who:

• Are comfortable with currency risk;

• Have a longer investment time horizon; or

• Hold a particular view on the future direction of the Australian dollar. 

What is a Hedged fund?

Hedged international share investments aim to remove, or “hedge”, the impact of currency fluctuations.

How do Hedged funds work?

Hedged funds typically use financial contracts (such as currency forwards) designed to offset changes in exchange rates.

The intention is that: 

• The investor’s return more closely reflects the performance of the underlying international share market

• The impact of movements in foreign currencies relative to the AUD is reduced or removed. 
  

What are the risks and benefits of Hedged funds? 

• Reduced currency risk – returns are driven mainly by the share market, not exchange rate movements.

• Lower return variability from currency – this can help smooth portfolio outcomes over shorter time periods.

• Costs of hedging – hedging is not cost‑free. There are implementation costs and, at times, hedging may detract from returns if currency movements would otherwise have been favourable for an unhedged investor. 
  

Hedged funds may appeal to investors who:

• Prefer to focus on share market risk rather than currency risk; or

• Want international shares to play a more defined role within their overall asset allocation. 

Hedged or Unhedged: which is better?

There is no single “right” answer to whether hedged or unhedged international funds are better. They behave differently at different times, and: 

• Currency movements are difficult to predict reliably;

• The interaction between currency and equity markets adds another layer of complexity. 

For many Australian investors, instead of choosing only one, a well‑diversified portfolio may include both hedged and unhedged international shares. This can:

• Balance the potential benefits and risks of currency exposure over the long term;

• Reduce reliance on any single outcome for the Australian dollar; and

• Help manage overall portfolio volatility.
  

Some investors with higher risk tolerance and a strong view on future currency movements may choose to hold more of one exposure than the other.

How do I chose between Hedged and Unhedged funds? 

 The appropriate mix of hedged vs unhedged international shares will depend on factors such as: 

• Investment time horizon

• Risk tolerance and capacity for loss

• Income needs and cashflow requirements

• The role of international shares within the overall portfolio structure.

A considered strategy will look at how currency risk interacts with your broader goals, other investments, and your stage of life. 

International Fixed Interest: Hedged or Unhedged? 

International fixed interest (bond) investments are typically treated differently from international shares when it comes to currency exposure.

In practice, international fixed interest investments for Australian investors are almost always hedged back to the AUD.

This is because:

• Expected returns from bonds are usually lower, and less volatile, than returns from shares; and

• If left unhedged, currency movements could easily dominate the return outcome, undermining the defensive role that fixed interest is intended to play in a portfolio.

By hedging international fixed interest, investors can access global bond markets while preserving the role of fixed interest as a stabilising, defensive component within a diversified portfolio.

Summary: hedged vs unhedged funds for Australian investors 

Managed funds and ETFs present investors with a simple and practical way to access international investment markets.

Hedged and unhedged international investments can each play a role in portfolio construction:

• Unhedged international shares provide exposure to both global share markets and currency movements.
  
  
• Hedged international shares focus on returns of the overseas share market(s), reducing or eliminating the impact of currency movements.
  
  
• International fixed interest investments are typically fully hedged to preserve their defensive characteristics.

Investment decisions should always be made in the context of your individual circumstances, needs and personal objectives.

Factors such as your financial goals, time horizon, tax position, tolerance for risk, are all important when determining an appropriate portfolio of investments.

Individual investors should seek personal advice from a licensed Financial Adviser, who can provide recommendations tailored to their personal needs and objectives.

Sources include: Vanguard

The information provided is factual only, and does not constitute financial advice. If you need to speak with a Financial Adviser before making a decision, you can contact us via the button below.