Mutual fund foreign currency hedging

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avbferry
Posts: 79
Joined: Tue Jan 03, 2012 8:09 am

Mutual fund foreign currency hedging

Post by avbferry »

In the prospectus of a mutual fund I have been looking at, it indicated that some form of currency hedging is in place. What confuses me then is why the USD Class units are showing a positive return since inception while the SGD Class units show a negative? Shouldn't they move in the same direction?
(http://www.fundsupermart.com/main/admin ... 370281.pdf).

The full paragraph relating to currency risks from the prospectus is as follows:
The net asset value per Unit of a Sub-Fund will be computed in the base currency of the relevant Sub-Fund whereas the investments held for the account of that Sub-Fund and/or the relevant Vanguard Umbrella Sub-Fund may be acquired in other currencies. The base currency value of the investments of a Sub-Fund and/or the relevant Vanguard Umbrella Sub-Fund designated in another currency may rise and fall due to exchangeable fluctuations in respect of the relevant currencies. Adverse movements in currency exchange rates can result in a decrease in return and a loss of capital. The investments of each Class of each Sub-Fund may be fully hedged into the base currency of the Sub-Fund. The investments of each Sub-Fund and/or the relevant Vanguard Umbrella Sub-Fund may be fully hedged into its base currency. In addition, currency hedging transactions, while potentially reducing the currency risks to which a Sub-Fund and/or the relevant Vanguard Umbrella Sub-Fund would otherwise be exposed, involve certain other risks, including the risk of a default by a counterparty.

Where a Sub-Fund and/or the relevant Vanguard Umbrella Sub-Fund enters into "cross hedging" transactions (e.g., utilising currency different than the currency in which the security being hedged is denominated), the Sub-Fund and/or the relevant Vanguard Umbrella Sub-Fund will be exposed to the risk of changes in the value of the currency in which the securities are denominated, which could result in loss on both the hedging transaction and the Sub-Fund and/or the relevant Vanguard Umbrella Sub-Fund securities.
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