A Unique, International Multifactor Approach

Director of Modern Alpha

As the yen and euro lose significant value this year against the dollar, investors are seeing that currency hedging is not an emerging market (EM) play, but they are increasingly revisiting whether currency hedging makes sense for developed markets (DM), like the European and Japanese equity markets.

We’ve believed that currency risk is not necessarily a risk that investors get paid for taking, and international currency tends to lose value at the same time its equity loses value. In the current geopolitical and Fed rising rate environment, currencies are coming under increased pressure.

MSCI EAFE Developed Markets Are the New MSCI Emerging Markets: Currency Volatility

The average volatility of the developed market currency basket has moved higher than the emerging market currency basket. 

WisdomTree applies a systematic multifactor strategy to adjust the hedge ratios of currencies, and the average hedge ratio this year has been about 77%. This has helped cushion the declines in our International Multifactor strategy year-to-date.

Combining a Currency Factor with Equity Factors: The Potential for Good Performance with Lower Volatility

In WisdomTree’s International Multifactor Fund (DWMF), factors like value, quality, momentum and low volatility combine to reduce volatility.

Minimum-volatility (min-vol) strategies have high valuations due to their popularity for the last 10+ years, while the dynamically hedged multifactor strategy has delivered the same or lower volatility without sacrificing return and quality characteristics.

DWMF Performance vs. Benchmark

Performance as of 10/7/22

See the DWMF Fund page for full standardized performance data and other important information.

DWMF Portfolio Characteristics vs. Benchmarks: Higher Quality and Dividend Yield

WisdomTree International Multifactor Has Achieved High Morningstar Foreign Large Blend Peer Group Rankings

In summary, we strongly urge investors to rethink currency exposure in their non-U.S. portfolios, both for developed markets and emerging markets. Dynamic currency hedging and half or full currency hedging are ways investors could manage currency risk to reduce volatility in the current market environment.


For definitions of terms/indexes in the charts above, please visit the glossary.


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Important Risks Related to this Article

Please read the prospectus carefully before investing.

Investing involves risk, including the possible loss of principal. Investments in non-U.S. securities involve political, regulatory and economic risks that may not be present in U.S. securities. For example, foreign securities may be subject to the risk of loss due to foreign currency fluctuations, political or economic instability or geographic events that adversely impact issuers of foreign securities. Derivatives used by the Fund to offset exposure to foreign currencies may not perform as intended. There can be no assurance that the Fund’s hedging transactions will be effective. The value of an investment in the Fund could be significantly and negatively impacted if foreign currencies appreciate at the same time that the value of the Fund’s equity holdings falls. While the Fund is actively managed, the Fund’s investment process is expected to be heavily dependent on quantitative models, and the models may not perform as intended. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profiles.

Related Funds

WisdomTree International Multifactor Fund


About the Contributor
Director of Modern Alpha

Liqian Ren, Ph.D., joined WisdomTree as Director of Modern Alpha in 2018. She leads WisdomTree’s quantitative investment capabilities and serves as a thought leader for WisdomTree’s Modern Alpha® approach. Liqian was previously at Vanguard, where she worked for 12 years, most recently as a portfolio manager in the Quantitative Equity Group managing Vanguard’s active funds and conducting research on factor strategies. Prior to joining Vanguard, she was an associate economist at the Federal Reserve Bank of Chicago. Liqian received her bachelor’s degree in Computer Science from Peking University in Beijing, her master’s in Economics from Indiana University—Purdue University Indianapolis, and her MBA and Ph.D. in Economics from the University of Chicago Booth School of Business. Liqian co-hosts a podcast on China and Asian markets with Jeremy Schwartz, WisdomTree’s Global Head of Research, and she is a co-host on the Wharton Business Radio program Behind the Markets on SiriusXM 132.