Investing glossary
Currency hedging (hedged)
A currency-hedged fund neutralizes, through financial instruments, the exchange-rate effect between the fund's currency and the currency of the assets it buys.
For example, a euro-based investor who buys US bonds unhedged takes on both the bond risk and the EUR/USD exchange-rate risk; the "EUR-hedged" version of the same fund neutralizes that second risk, leaving only exposure to the underlying asset.
Hedging has a cost (usually reflected in a somewhat higher TER) and, over the long run, can slightly reduce expected returns compared with the unhedged version, in exchange for less volatility from currency swings.