Currency risk and hedging

When you invest abroad, every return has two engines: how the asset performed, and how the exchange rate moved. Understanding this is essential — it is the defining feature of foreign investing.

How the two combine

Imagine you buy a US asset that rises 10% in dollars. Your return in reais depends on the dollar/real rate:

• If the dollar strengthened against the real over the period, your real-denominated return is more than 10%.
• If the dollar weakened, your real return is less than 10%, and a large enough move could even turn a dollar gain into a real loss.

So currency can amplify or erase the underlying performance. For a Brazilian, dollar exposure has historically also acted as a cushion in crises, when the real tends to weaken — but that is a tendency, not a guarantee.

Is the currency exposure a bug or a feature?

For most long-term Brazilian investors, dollar exposure is a feature — it is part of why they invest abroad. They deliberately want assets that do not depend on the real.

Hedging

You can neutralise currency movement using hedged products (for example a currency-hedged ETF) or derivatives, leaving only the asset's local-currency return. But hedging has a cost and removes the very protection many investors sought. Most long-term investors hold unhedged foreign assets on purpose; hedging makes more sense for shorter horizons or specific liabilities in reais. Decide deliberately rather than by accident.