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Currency Hedged Share Classes

In addition to offering currency denominated classes, GSAM also makes available currency hedged share classes on certain Portfolios of its UCITS-qualifying Goldman Sachs Funds SICAV. Please see below for further information and key considerations related to currency hedged share classes, as well as information on the hedging process itself and potential impact on performance.



What is the Objective of Currency Hedged Share Classes?
 

Currency hedged share classes typically seek to hedge the currency exposures of the Portfolio to the relevant share class currency and are designed for investors who want to gain exposure to assets denominated in foreign currencies, without the associated currency risk.

For example, a European investor in the GS US Equity Portfolio who does not wish to be exposed to the additional risk of foreign exchange (“FX”) movements between the currency exposure of the Portfolio (USD) and their dealing currency (EUR) could invest in a EUR-hedged share class, which would aim to provide the investor with exposure to the performance of the underlying US equity holdings only.


What are the Key Considerations Related to Currency Hedged Share Classes?
 

In practice, the share class hedging process (as outlined below) is not perfect and it only seeks to reduce, not eliminate, the effect of FX movements between the currency exposures of the Portfolio and the relevant share class currency and therefore there can be no assurances that currency hedging will be fully successful and a currency hedged share class may still retain a level of currency exposure.

It is also important to note that the volatility of the underlying asset class may magnify the extent of any imperfect hedging and significant movements in the underlying asset class may result in the currency hedged share class being over or under hedged, which may also impact return expectations.

Finally, whilst expected to be relatively low, the share class hedging process has associated transaction costs which will negatively impact the share class performance. These are discussed further in the sections below.


How Does the Hedging Process Work in Practice?
 

Currency hedged share classes employ currency forward contracts in order to hedge the currency exposures of the Portfolio to the relevant share class currency.  Please see below for a high level summary of the hedging process:

  1. Subscriptions into a hedged class are converted into the base currency of the Portfolio at a spot FX rate
  2. Forward currency contracts are used to hedge the Portfolio currency exposures to the share class currency
  3. Gains or losses on forward currency contracts are accrued as part of the daily share class NAV calculation
  4. Forward currency contracts are rolled on a typically monthly basis although may be more or less frequent
  5. At each roll date, any gains or losses associated with the hedging transaction will crystallise

As mentioned above, any gains or losses associated with the forward currency contracts will not become available for investment in the underlying portfolio assets until each roll date, and therefore this may impact return expectations.

Furthermore, Shareholders should also be aware that, in line with market practice, forward currency contracts are typically uncollateralised and therefore this introduces counterparty risk and the potential for losses where a party the Portfolio transacts with fails to meet its obligations.


What are the Different Types of Currency Hedged Share Classes?
 

As disclosed in the Prospectus, GSAM offers three distinct types of currency hedged share classes which are further detailed below:


1. The main type of currency hedged share classes are those that seek to hedge the currency exposures of the Portfolio to the relevant share class currency and such classes are designed for investors who want to gain exposure to assets denominated in foreign currencies, without the associated currency risk.

Such share classes, using a EUR denominated class as an example, would be denoted: “(EUR-Hedged)”.

Investors should however be aware that for certain Portfolios, including for instance our regional or global equity portfolios, rather than seeking to fully hedge all portfolio currency exposures, the Investment Manager will seek to minimise transaction costs by hedging only the predominant currency exposures of the Portfolio to the relevant share class currency, and therefore there may be residual currency exposures that remain unhedged. For example, a (EUR-hedged) share class offered on our GS Global Equity Partners Portfolio would seek to hedge only USD, GBP and CHF exposures, which when combined with EUR exposures typically represents 90% of the Portfolio.


2. For certain Portfolios, GSAM offers share classes which seek to partially hedge the currency exposures of the Portfolio to the relevant share class currency. Such classes are offered where the Investment Manager wishes to retain the currency exposures associated with certain asset classes (e.g. global equity portion of a Flexible Portfolio) or certain countries (e.g. emerging market countries) and as such these classes are designed only to hedge a certain proportion of the currency exposures of the Portfolio.

It is important to note that these share classes will still retain a level of currency exposure, which could be significant, and therefore such share classes should not be considered fully hedged to the relevant share class currency.

To ensure that this is clear to investors, such share classes, using a EUR denominated share class as an example, would be denoted as “(EUR-Partially Hedged)”


3. In addition to the above, GSAM may also offer share classes which seek to hedge only the base currency exposure to the relevant share class currency. However it is important to note that that in this case, investors will still be exposed to the FX movements between the currency exposures of the Portfolio currencies and its base currency, and therefore investors may not regard this as currency hedged.

To ensure this is clear to investors we include a description of the resulting currency exposures in the share class name. For example, a EUR denominated class offered on the GS BRICs Portfolio, would be denoted as follows “(EUR) (Long BRICs Ccy vs USD)”. This means that a European investor subscribing to such a share class would be exposed to foreign exchange movements between the currency exposure of the Portfolio (BRICs) and its base currency (USD).


How Will a Currency Hedged Share Class Perform Relative to Equivalent Base Currency Share Class?
 

Where GSAM offers currency hedged share classes which seek to hedge the currency exposures of the Portfolio to the relevant share class currency (see type (a) above), these would be expected to provide returns more closely correlated with the performance of the equivalent base currency share class. However, they will not be exactly the same for the reasons outlined below:

Interest Rate Differential

The largest contributor to differences in returns between currency hedged share classes and the equivalent base currency class is a difference in the prevailing interest rates between the base currency and relevant share class currency, and this can have a positive or negative effect:

Exhibit 1: GBP-hedged share class on USD base currency portfolio

Exhibit 1: GBP-Hedged Share Class on USD Base Currency Portfolio

This examples is for illustrative purposes only and interest rates are subject to change.

Exhibit 2: JPY-hedged share class on USD base currency portfolio

Exhibit 2: JPY-Hedged Share Class on USD Base Currency Portfolio

This examples is for illustrative purposes only and interest rates are subject to change.

Transaction Costs

Transaction costs arising from the hedge implementation will be borne by the relevant hedged share class and whilst these are typically relatively low they will negatively impact the share class return. Such transaction costs will also increase the more frequently the forward currency contracts used for the purposes of hedging are rolled.

Timing Differences

The share class performance may also be impacted by differences between the timing of currency hedge adjustments and the Portfolio’s valuation point.

Hedging Process

Whilst we typically look to hedge 100% of the net asset value of the Portfolio it may be that in order to avoid transaction costs of minor adjustments that the hedge may not always be at 100% and therefore may not be perfect.

To illustrate how a currency hedged share class of a Portfolio behaves relative to the equivalent base currency class please refer to the below chart which shows how the performance of EUR currency hedged share class of our GS US Equity Portfolio has performed relative to the equivalent base currency (USD) class.

Please note that the NAV per Share data shown for the Base (Acc) share class has been rebased to 17 June 2009 which represents the launch date of the Other Currency (Acc) (EUR-Hedged) share class.

nav-share-graph

This chart is for illustrative purposes only and past performance is not a guide to future returns.

The above chart illustrates how a currency hedged share class which seeks to hedge the currency exposures of the Portfolio to the relevant share class currency, may provide a return more closely correlated to the return of the equivalent base currency class, although due to the factors outlined above there may be some deviation over time.


Does GSAM Offer Currency Hedged Share Classes in Non-Major Currencies?
 

In some limited circumstances, GSAM may make available currency hedged share classes in non-major currencies which may be implemented using Non-Deliverable Forward Contracts (“NDFs).

Investors should be aware that NDFs differ from normal forward current contracts in that there is net cash rather than physical settlement at maturity and that NDF markets may have limited trading volume. Therefore there can be no assurance that the Portfolio will be able enter into NDF contracts and that prices may be volatile due to a range of factors, which could result in prices that are materially different to the exchange rate of the underlying currency.

Furthermore, the interest rate differential (see Section F1 above) earned on NDF contracts may be materially less than the yield available by holding the physical currency and therefore this may impact share class return expectations.

Such currency hedged share classes, which utilise NDFs, would be denoted: “(NDF)”.