Factors can expand the opportunity set of traditional asset allocation when pursuing either FX tail-hedging or return-seeking strategies
Currency hedging is often approached with an all-or-nothing mentality: either full hedging of all foreign exchange (FX) positions or no hedging at all. There are good reasons to believe that the optimal currency hedge lies between the two extremes.
As a more nuanced alternative, we suggest systematically harvesting the benefits of the FX style factors carry, value and momentum. In particular, we demonstrate how these factors can expand the opportunity set of traditional asset allocation when pursuing either FX factor-based tail-hedging or return-seeking strategies.
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