Multi-currency investment funds: Your protection from exchange rate fluctuations

With exchange rates changing frequently in recent times, the Arab investor begins to wonder: how can I preserve the value of my savings if I am investing in overseas markets? The solution is not withdrawing funds into foreign currency accounts, but can be through multi-currency investment funds that combine asset diversification with exchange rate protection.

What is a multi-currency investment fund?

Multi-currency investment funds are managed funds that maintain their investments in assets denominated in different currencies – for example, the US dollar, euro, pound sterling or Saudi riyal – and typically value investor shares in a base currency chosen by the fund. This differs from traditional funds that value their shares in a single currency only.

Why does this matter now?

Since the beginning of the year, regional and global currency pairs have experienced sharp fluctuations due to oil price reports, interest rate decisions, and even geopolitical crises. If you have investments in US stocks or European bonds, any decline in the value of your local currency will reduce your actual returns. Multi-currency funds reduce this effect by spreading risk across several currencies or through hedging policies.

How do multi-currency funds work?

There are three main models:

• Funds holding a multi-currency portfolio without hedging – relying on market movement to achieve returns.
• Partially hedged funds – conducting purchases of futures contracts to reduce exchange rate risk, while retaining part of the potential gain from currency movements.
• Fully hedged funds – locking the fund’s value in a base currency (for example, SAR) through hedging transactions that cover the full FX exposure.

The investor sees the net asset value (NAV) in the base currency, while the fund manages conversion operations in the background.

Main benefits

1️⃣ Currency diversification reduces the likelihood of your portfolio being exposed to sharp fluctuations in a single currency.
2️⃣ Access to international markets without needing to open separate foreign exchange accounts.
3️⃣ If the fund is hedged, the risks linked to exchange rate fluctuations are significantly reduced, leaving the focus on the performance of the assets themselves.

What to consider before choosing

• Hedging policy: Does the fund hedge fully or partially? Full hedging adds higher cost but provides greater stability.

• Currency allocation ratio: Some funds focus on the dollar and euro, others add Asian currencies such as the yuan or Chinese yuan.

• Management fees: Hedged funds often carry higher fees (0.8‑1.5% annually) due to the costs of futures contracts.

• Transparency: The fund’s prospectus should be clear about the hedging instruments used and their timing.

• Liquidity: Ensure the fund allows you to redeem your shares without significant loss in value, especially if it is a closed-end fund.

Practical steps to invest in a multi-currency fund

1. Define your goal – If your goal is capital preservation, you may prefer a fully hedged fund. If you seek higher returns and accept greater volatility, you may choose an unhedged fund.

2. Search for the fund via a brokerage platform or asset manager’s website. Use the term “multi‑currency” or “currency‑hedged” in the filter.

3. Review the prospectus to learn about the current currency composition, hedging policy, and fees.

4. Compare funds using performance indicators (Total Return), standard deviation, and hedging costs.

5. Open an account with a brokerage that supports multi-currency funds and start with a minimum (often starting from 5,000 SAR).

6. Monitor performance regularly; check for any changes in currency allocation or hedging policy.

Real-world example

Salman, residing in Riyadh, wishes to invest 50,000 SAR in US stocks and European bonds. Instead of converting the riyal to dollars then buying shares, he chose a fully riyal-hedged multi-currency fund. The fund holds most of its assets in US dollars and euros, but purchases futures contracts to lock in the exchange rate. As a result, when the dollar rose against the riyal, Salman did not feel a loss in his profit, as the hedge covered the difference. Conversely, he bears additional hedging fees estimated at 0.9% per year, which remains lower than the potential loss in the absence of hedging.

Potential risks

• Hedging costs may reduce net return if explicit market volatility does not occur.

• Unclear allocation may lead to unintended concentration in a particular currency.

• Performance deviation – unhedged funds may show returns higher or lower than the market based on currency movements.

Final advice

Multi-currency investment funds are not merely a tool for advanced investors; they can serve as a safe bridge for the Arab investor wishing to expand horizons without fear of exchange rate fluctuations. The smart choice depends on clear goals, understanding the hedging policy, and comparing cost against benefit. If the steps outlined are followed carefully, you will obtain an international portfolio with relative safety, and benefit from global growth opportunities without exposing yourself to unfamiliar currency risks.

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Disclaimer: This content is for educational and informational purposes only and does not constitute financial or investment advice. Consult a professional before making any financial decision.