There are three primary approaches to managing the currency exposure in an international portfolio.

Under a strategic hedge ratio approach, the investment manager is given total responsibility for managing the portfolio, including managing the currency exposure. The manager follows the guidelines of the investor’s IPS, which will specify whether the portfolio is to be benchmarked and the degree to which translation risk must be hedged.

Currency overlay: The currency overlay approach still follows the IPS guidelines, but the portfolio manager is not responsible for currency exposure. Instead a separate manager, who is considered an expert in foreign currency management, is hired to manage the currency exposure within the guidelines of the IPS. That is, the portfolio, including the currency exposure, is managed by two managers to adhere to the IPS guidelines.

Separate asset allocation: When currency is considered a separate asset, it is managed as if it were a totally separate allocation given to a separate manager and managed under its own, separate guidelines. Effectively, this is a currency play with an absolute return benchmark.