Currency hedging often leads to high costs for investors. Besides direct costs like higher product fees (often called Total Expense Ratio or TER), there are also “hidden” costs. The fund uses derivatives purchased from banks for hedging, and both these derivatives and the transactions cost money.

However, the largest portion of the cost is economic. Investors pay the interest rate differential between their “home currency” and the currency they are hedging against. For example, if a Swiss franc investor wants to hedge against the US-Dollar, this currently costs 3-4% per year (US interest rate: 4.5%, Switzerland: 0%). For a US-Dollar hedge to be “worthwhile”, the US-Dollar would therefore have to lose about 4% against the Swiss franc annually.