Series: Foreign currencies – the 10 most common mistakes
#01 Underestimating the Impact of Currency on Performance
How much does currency drive performance?
Exchange rates feed one-for-one into home-currency performance, which has two components:
- Investment return (Price and interest rate moves in local currency)
plus
- Currency return (Moves of the investment currency vs. the CHF)
Given its complexity, investors sometimes underestimate the currency risk inherent in international equities, bonds and funds.
An Example – 2025 made the point
- S&P 500, +16%, Gain in USD
- USD against CHF, -12%, Loss against the CHF
What this means: For an unheged Swiss investor, that +16 % came down to a return of roughly 2%. Currency absorbed most of the gain.
What can you do?
- Assess the risk: Quantify exposure + expected volatility
- Direct hedging: Hedge with forwards or an overlay
- Indirect hedging: Use currency-hedged fund classes
- Report the split: Show investment and currency return separately
The key insight – Unmanaged currency exposure leaves part of your return to chance
The currency effect can be measured, assessed and hedged. Ignoring it can be expensive – managing it deliberately creates transparency and control.
- How well did my investment perform?
- How much of that came from currency?
Coming next month
03/10 Asking AI whether a currency will rise or fall… Should we?