Dollar volatility leaving funds balance gains and FX losses

Fund managers across the US and Canada are reassessing their approach to FX risk as persistent geopolitical tensions add to market and currency volatility, affecting investment decisions and currency exposures.

While dollar volatility has supported the returns for many funds, the data also points to the continued cost of leaving exposures unhedged. The response has not been to simply hedge more, but to reconsider the use of hedge ratios, tenors and the infrastructure needed to implement an effective hedging strategy.

 

Policy uncertainty delays decisions while dollar volatility shapes returns

Policy uncertainty has become a direct constraint on capital deployment, while currency moves continue to influence portfolio outcomes.

No single external factor overtly dominates the FX agenda. US tariffs and trade policy and Federal Reserve/Bank of Canada rate policy are tied at 34% as the leading influences on hedging strategy. Middle East geopolitical tensions follow closely at 31%. The narrow spread between factors indicates that funds are managing several overlapping sources of risk rather than one clear market driver.

Top executives differ in this regard, with CFOs most focused on central bank rate policy (37%), while CEOs are more concerned about Middle East geopolitical tension (67%). Key concerns also differ by fund size, as the smallest are focused most on geopolitical tensions (38%), whereas the largest funds are more concerned about central bank rate policy (50%).

The effect of these issues on investment decisions, however, is close to universal. In total, 98% say US policy uncertainty caused their fund to delay investment decisions over the past 12 months, a figure that rises to 99% amongst CFOs. This includes 35% that significantly delayed decisions and 64% that somewhat delayed them. Only 2% report no delay.

These delays can change the timing of acquisitions, disposals, capital calls and cash deployment. They can also alter the size and duration of expected currency exposures, which brings FX planning closer to the investment decision itself.

However, dollar volatility has had a positive overall impact for most respondents. Some 94% report a positive effect on returns from an FX perspective, including 28% that describe the impact as significant. A further 4% report a negative impact, while 2% report no impact.

The broader return picture still contains material pockets of unhedged loss. 97% report losses from unhedged FX exposure linked to geopolitical tensions in Q1 2026. The average loss was USD $730,664.91, with most losses ranging between $100,000 and $499,999, although 12.4% reported losses between $1 million and $4.9 million.

This combination is an important reminder that favorable currency moves at fund level can sit alongside costly gaps in individual exposures. The quality and timing of hedging remain relevant even when the overall FX contribution is positive.

 

Hedging reaches a four-year high

2026, so far, has been a year of uncertainty, and fund managers have responded to this by expanding their use of hedging.

94% of respondents hedge their forecastable currency risk. This is up from 85% in 2025, 79% in 2024 and 72% in 2023. The increase of 8.4 percentage points since last year brings North American hedging uptake to its highest level in the four-year series.

Notably, there is a split in hedging when it comes to fund size. The smallest funds are more likely to hedge than the largest funds, at 98% and 88%, respectively. This may reflect the fact that, given their smaller asset base, any losses arising from unhedged FX exposure could have a proportionally greater impact, particularly in a volatile currency market.

Among the small group of funds that do not hedge (6%), burdensome hedging infrastructure is now the most common reason, cited by 56%. It has moved ahead of capital allocation and cost as the main barrier. Some 38% say capital is better deployed elsewhere, while 31% cite expense and the same share report minimal exposure.

For the remaining non-hedgers, postponing infrastructure work can resemble putting off a dental check-up: the immediate saving is visible, while the eventual intervention may be more involved.

Appetite among non-hedgers remains high, although it is broadly unchanged from last year. In 2026, 69% say they are considering hedging given market conditions, compared with 70% in 2025. The figure remains well above 2024, when only 16% were considering it.

The average increase in hedging costs was broadly unchanged from 2025, at 57%. The distribution, however, has changed, with the share of respondents reporting that costs have at least doubled increasing from 5% to 11%, while the share reporting a 50% to 100% increase fell from 58% to 48%.

This points to a more uneven cost environment, as the smallest funds report a mean increase of 40%, compared with 56% among the largest funds. CFOs, meanwhile, report a mean rise of 66%, while CEOs report 37%.

The rise in hedging is clear. For the remaining non-hedgers, efficient infrastructure has become as important as the headline cost.
Eric Huttman, CEO of MillTech

 

Fund hedging strategies: Ratios and tenors move higher

In addition to deciding to hedge more, funds are changing how they hedge. Extending hedge length is the most common planned response to US policy uncertainty, selected by 63%, showing the need to keep prices locked in for longer. 35% also plan to increase their hedge ratios, though 24% plan to reduce hedge ratios and 8% plan to shorten hedge length. Just 2% plan on keeping their hedging strategies the same.

The mean hedge ratio has increased to 48%, from 45% in 2025, remaining below the 55% reported in 2024. The most common coverage band is 26% to 50%, selected by 56% of respondents, followed by 51% to 75% at 31% of respondents.

The average hedge tenor has also moved higher, reaching 5.44 months, compared with 4.97 months in 2025, 5.41 months in 2024 and 4.96 months in 2023. The 2026 mean is the longest in the four-year series.

Fund size also shapes hedging behavior. Funds with $5bn–$9.99bn in AUM are most likely to increase hedge ratios, while those with $10bn–$20bn are most likely to extend hedge length. The smallest funds currently have lower coverage than the largest, with a mean hedge ratio of 37% versus 52% and a slightly shorter tenor of 5.00 months versus 5.43 months.

FX hedging instrument usage remains broad, with spot transactions now ranking first at 36%, despite lower reported usage than in 2025 (48%). Foreign currency bank accounts follow at 34%, with currency options at 32% and currency swaps at 31%. In addition, deliverable forwards and deal-contingent forwards are each used by about 30%.

To access the full data and insights, download our free 2026 North American fund manager FX report.

 

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