A pick up in currency market volatility over the last few days after years of suppression by central banks' easy-money policies has prompted some investors to look again at protecting against, or profiting from, sharp moves.
To hedge or not is a question that divides asset managers, with some actively buying and selling currency exposure through derivatives to boost or protect returns, and others refusing to spend the money, viewing the long-term impact as neutral.
Even when they do hedge to protect earnings from overseas, many focus on bonds rather than equities, given currencies often move inversely to the more volatile stock market and the impact of adverse currency swings is bigger on fixed-income assets.
But as global central banks look to tighten policy, lowering expected market returns, the perceived risk from a currency move rises - a leading index of implied currency volatility is up by half over the past five weeks.
It can be justified: the dollar fell 10 percent in 2017 against the currencies of its main trading partners while sterling rose steadily.
These moves were relatively gradual, lacking the spikes of volatility that marked previous shifts thanks to the numbing effect of the trillions that central banks poured into financial markets after the 2008 global crisis. But the anesthetic is being slowly withdrawn, led by the U.S. Federal Reserve which has already raised interest rates five times this cycle.
The $4 trillion wiped off global stocks from record highs only eight days ago is a timely reminder that, as Rabobank analysts noted, "one-way bets don't exist."
On top of this, major currency swings can make a big difference to the end-of-year returns for active fund managers invested in foreign markets as they fight to prove their skill to clients who have one eye on cheaper, index-fund alternatives.
Sterling's 20 percent rise to a post-Brexit referendum high of $1.43 in late January, coupled with uncertainty over future moves as Britain negotiates to leave the European Union, has prompted others to act.
One is Janus Henderson's head of multi-asset investing, Paul O'Connor, given the increasing portion of his portfolios invested in overseas markets ranging from Japanese equities to U.S. corporate debt.
"As a result, we are running about a third to half of portfolios on a hedged basis as we have a very low conviction on where sterling is headed with many of the factors that were supportive of sterling previously starting to look a bit tired now," O'Connor, whose funds manage 5 billion pounds, said.
Mark Astley, CEO at Millennium Global Investors, a currency investment manager, offers a range of hedging or profit-seeking foreign exchange strategies to investors, more of whom were concerned about the impact of a large currency swing.
"We are having a lot more conversations in the last 6-9 months than we have had for a number of years before on the potential impact of a 10 percent currency move," he said.
Such a swing would have a much bigger effect on investors' returns if they expect their portfolios to grow by zero to five percent in the post easy-money era, rather than by 10 to 15 percent as in the recent past.
Any decision to hedge can translate into market flows of hundreds of millions of dollars in the currency forwards and swap markets most often used by investors and become a big source of strength for currencies.
While realized volatility in foreign exchange markets has declined in recent years as a result of the central bank policies, the market has still been hit by sharp moves around unexpected macroeconomic events.
Among the biggest of recent years were the Swiss central bank's removal of the franc's peg to the euro in January 2015, and sterling's plunge after the Brexit referendum.
Before the vote, many large investors had no currency hedges in place and so reaped windfall profits as the pound fell more than 15 percent, boosting the value of their overseas assets in sterling terms.
Colin Hart, a multi-asset portfolio manager at BNP Paribas Asset Management, said many UK pension funds and insurers were conscious they had enjoyed a good run from non-sterling market exposure and were turning a little more cautious.
"The trend is to go back towards a long-term neutral level, which should be around 65 percent hedged, and now we have got only 45 percent."
Mercer's annual asset allocation survey for 2017 - which covers more than 1,200 institutional investors holding more than $1.1 trillion - found that a majority hedge about 40 percent of their currency risk.
"Though most pension funds don't pursue an active hedging strategy, in most cases, they will put in place a long-term strategic hedge ratio that doesn't change dramatically over time," said Phil Edwards, global director of strategic research at Mercer.
Unlike hedge funds which look to boost investment returns from currency hedges, longer-term investors such as pension funds view currency hedging as a tool to cushion the impact of foreign exchange volatility on portfolios and therefore have a longer-term ratio they work with.
More questions are also being raised by asset owners in the United States where U.S. stocks plunged on Monday, with the Dow Jones average notching up its biggest intraday decline in history with a nearly 1,600-point drop - making overseas returns even more important.
"The question we are asking U.S. investors is that you had a perfect year in 2017 from your domestic equity market returns and a weaker dollar boosting the value of your overseas assets and that can easily transform into a perfect storm," said James Wood-Collins, CEO at Record Currency Management, which advises nearly $60 billion in currency hedging strategies to clients.
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