Does Your Foreign Fund Hedge Its Currency Bets?

Still, though, many of the larger fund companies, such as T. Rowe Price and Fidelity, do not hedge any of their international funds. George Greig, manager of William Blair's (WBIGX Quote)International Growth fund, says he rarely hedges because, on a macro level, he expects the currencies in the foreign markets he's invested in to appreciate, and on the micro level, he allows the companies to hedge themselves.

Some funds will make ad hoc currency hedges, Hall says, but that's almost always to preserve a gain. "Most stock fund managers do not take currency bets," she says. "The vast majority of international stock funds are either hedged or unhedged. When managers hedge on an ad hoc basis, they're trying to protect gains, not boost returns."

Unlike stock funds, international bond funds use a variety of ad hoc hedging tactics, and are not necessarily entirely hedged or are not hedged. "International bond funds are driven by managers making macroeconomic calls," Hall says. "They're hedged according to how various economies are performing against one another. Currency calls are that part of macroeconomic analysis."

Currency calls are best left to the professionals, which is why you don't want to attempt switching between hedged and unhedged funds based on where you think the dollar is heading, particularly when you factor in the transaction costs, which will eat away (if not eliminate) any slight edge you get in the short term. Instead, choose an international fund based on the same criteria -- cost, tax efficiency, diversity, its role in your portfolio -- as you would a domestic stock fund.

"Mutual fund investors needn't concern themselves with the hedging issue," Valentine says. "It's one less thing to worry about when choosing a fund."