What are Canadian-dollar hedged funds?

• A. Funds that only invest in Canadian dollars with no currency exposure.
• B. Funds that hedge foreign currency exposure to reduce currency risk, typically at an added cost.
• C. Funds that hedges Canadian dollar exposure to foreign currencies.
• D. Funds that guarantee a fixed return.

Answer: (B)

Canadian-dollar hedged funds aim to give Canadian investors international exposure while neutralizing the impact of currency movements on their returns. They hold foreign assets but use hedging instruments, like forward contracts, to lock in the value of those investments in Canadian dollars. This reduces the effect of changes in exchange rates, so the fund’s performance reflects the foreign securities’ returns more than FX swings. The tradeoff is that hedging costs and potential imperfect hedges can slightly reduce overall returns and create tracking error versus unhedged counterparts.

The other ideas don’t fit: one describes funds with no currency exposure at all, which is not about hedging foreign currency risk; another suggests hedging CAD against foreign currencies, which is the reverse of what these funds do; and a guaranteed fixed return isn’t something hedged funds offer.