GLOBAL ASSET MANAGEMENT

Currency risk is low in the long term, as exchange rates tend to rever t to fundamentals over the very long run, but the contribution of curr encies to the longterm performance of a global portfolio never gets to be nil. Currency risk premiums exist in the long run and are consiste nt with world market equilibrium and finance theory. The author argues that if the plan sponsor sets a benchmark for a very long-term horizo n (say, fifty years), it should probably be unhedged as currency retur ns provide only a small, positive or negative, contribution to total r eturn, while systematic currency hedging is a cumbersome process. If t he plan sponsor has in mind a shorter strategic horizon (say, five yea rs), the ideal currency allocation in the strategic benchmark is, and will remain, a question open to debate. Applying some universal hedgin g rule is questionable in the presence of the complex,correlation stru cture of stock prices, interest rates, and exchange rates. Finally, th e author explains that if the plan sponsor believes in active manageme nt, currencies should be an integral part of the tactical asset alloca tion and security valuation process.