A family we work with had a portfolio reported in US dollars, up 9% over the year, and felt poorer. Their spending was in sterling and euros, both of which had strengthened. Measured in what they actually buy, the year was flat.
This is the most common unmanaged risk in internationally mobile wealth, and it is almost never on the investment committee agenda.
Start with the liability, not the portfolio
Institutional investors have done this for decades: define the liabilities first, then build assets that match them. A family''s liabilities are simply the money it will spend and when.
Write them down honestly:
- Near-term (0–3 years): living costs, school fees, tax payments, planned purchases. Currency: whatever the family actually spends in, today.
- Medium-term (3–10 years): university, property purchase, business investment, possible relocation.
- Long-term (10 years+): retirement income, succession, philanthropy. Currency: wherever the family expects to be, weighted by the probability of each outcome.
Now compare that map to the currency composition of the assets. In most families the mismatch is large, unintended and undocumented.
The reporting-currency illusion
Consolidated reporting in a single currency hides the problem twice over. It flatters or punishes performance depending on the base currency chosen, and it obscures the fact that a "diversified" portfolio may be almost entirely dollar-denominated in economic terms — because global equity indices, a large slice of corporate credit, and most commodity exposure are dollar assets whatever the fund''s share-class currency says.
Ask for reporting in two currencies: the family''s primary spending currency and the base currency of the portfolio. The gap between the two lines is the currency exposure.
A framework we use
1. Fully match near-term liabilities. Money that will be spent within three years should be held in the currency it will be spent in, in cash or short-dated instruments. This is not a market view; it is removing an unnecessary risk from money with no time to recover.
2. Substantially match medium-term liabilities. Where the spending currency is known — a mortgage, a fee schedule, a committed purchase — match most of it. Where it is genuinely uncertain, split.
3. Let long-term growth assets be globally diversified and largely unhedged. Over long horizons, a globally diversified equity portfolio''s currency exposure is a diversifier rather than a pure risk, and the cost and complexity of permanent hedging usually outweighs the benefit. Hedging equity currency risk also introduces a cash-flow obligation at exactly the wrong moments.
4. Hedge fixed income back to the spending currency. Currency volatility swamps the return of high-quality bonds. Unhedged foreign bonds are not a defensive asset; they are a currency trade with a coupon.
5. Match debt to the asset and the income. A euro mortgage serviced from dollar income is a leveraged currency position. It may be the right position; it should at least be a chosen one.
The cost of hedging is not zero
Forward pricing reflects the interest-rate differential between the two currencies. When you hedge from a high-rate currency into a low-rate one, you give up much of that differential. Over a decade this compounds into real money. This is precisely why we hedge liabilities and defensive assets rather than everything: hedging should buy certainty where certainty is needed, not be applied as a blanket policy.
Practical instruments, in ascending order of complexity: holding the currency itself; currency-hedged share classes of funds; rolling forward contracts; options. Most families need only the first two.
Relocation changes the answer
A family expecting to move from London to Dubai in three years has a sterling liability profile that becomes a dirham — effectively dollar-linked — profile. The transition should be phased in advance rather than executed on the day of the move, when the whole position is exposed to a single exchange rate on a single date.
The same discipline applies to a business sale: if the proceeds arrive in one currency and the family lives in another, the exchange decision on completion day can matter more than a year of investment performance. Plan it before completion, in writing.
Where tax intersects
Currency gains are taxable in several jurisdictions, sometimes on transactions the family does not perceive as trades — repaying a foreign-currency loan, or switching share classes. Before implementing a hedging programme, confirm the tax treatment of forward contracts and currency gains in the family''s jurisdiction of residence. A hedge that works economically and creates dry tax charges annually is not an improvement.
What good looks like
- A one-page liability map by currency and horizon, reviewed annually.
- Portfolio reporting in both spending and base currency.
- Near-term money matched; defensive assets hedged; growth assets globally diversified.
- Debt currency deliberately chosen against the asset and the income servicing it.
- A written plan for any known future currency transition.
None of this requires a trading desk. It requires the family to state, in writing, what it will spend and in what.
FAQs
Should I just hold everything in dollars?
Only if you will spend in dollars. A dollar portfolio funding euro costs is a bet, not a default.
Are currency-hedged fund share classes enough?
For most families, for fixed income, yes. They are operationally simple and priced transparently.
Does gold solve currency risk?
No. Gold is a distinct asset with its own volatility, priced in dollars. It is not a substitute for matching liabilities.
How often should this be reviewed?
Annually, and immediately on any relocation, liquidity event or material change in debt.
