If you buy a US or global fund from the UK, you are taking two kinds of risk at once: the risk that the investments themselves go up or down, and the risk that the currency they are priced in moves against the pound. Currency hedging is a way of removing the second risk. Many funds offer a hedged version, and knowing what that means can help you choose the right one.
How currency hedging works
A hedged fund uses financial contracts, usually forward contracts, to lock in an exchange rate for a set period. If the dollar falls against the pound, the loss on the currency is roughly offset by a gain on the contract. If the dollar rises, the gain on the currency is offset by a loss on the contract. The result is that your return in pounds tracks the return of the underlying investments in their local currency, without the currency swings on top.
The fund rolls these contracts over regularly, often monthly, so the hedge stays roughly in line with the size of the portfolio.
An example
Imagine a US share fund rises 10 per cent in dollars over a year, but the dollar falls 8 per cent against the pound. An unhedged UK investor makes only about 1 per cent in pounds. A hedged investor makes close to the full 10 per cent, minus hedging costs. If instead the dollar had risen 8 per cent, the unhedged investor would have made about 19 per cent, while the hedged investor would still make around 10 per cent.
What hedging costs
Hedging is not free. Funds pay trading costs, and the price of a forward contract reflects the difference in interest rates between the two currencies. When UK interest rates are higher than US rates, hedging dollar exposure back into pounds can actually add a little to returns. When UK rates are lower, it costs money. Hedged funds also tend to have slightly higher ongoing charges.
Hedged or unhedged?
There is no single right answer. Hedging makes sense if you want your returns to reflect the investments rather than currency moves, or if you plan to spend the money in pounds within a few years. Over very long periods, many investors accept currency risk, believing it tends to even out. For bond funds, hedging is very common, because currency swings can be larger than the returns the bonds themselves provide.
Recent moves show why the choice matters. When the dollar weakened after the 2026 US midterms, covered in our Morning Market Brief, unhedged UK holders of US funds felt it on top of the fall in share prices. Our guide to what a weak dollar means for UK investors explains the effect in more detail.
The beginner’s takeaway
Currency hedging removes exchange rate swings from overseas investments, at a cost. It makes returns more predictable in pounds but means you miss out when the foreign currency rises. Knowing whether your funds are hedged, and why, is a simple but important part of understanding your own portfolio.
Building that kind of understanding is what separates confident investors from confused ones. To see where you stand, take the free Samuel & Co Trading Trader Assessment.
