What is a key trade-off of hedged funds?

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Multiple Choice

What is a key trade-off of hedged funds?

Hedged funds aim to neutralize the impact of exchange rate movements on foreign investments, so returns are less affected by currency swings. The key trade-off is that while hedging reduces currency risk, it can also dampen potential gains if exchange rates move in a favorable way for the investor, and it adds costs from implementing the hedge. This is why the best choice emphasizes both the reduction in currency risk and the potential for reduced upside plus additional costs. The other options don’t fit because hedging isn’t limited to CAD exposure alone, funds that hedge can still invest abroad, and hedging does not guarantee a fixed return.

Hedged funds aim to neutralize the impact of exchange rate movements on foreign investments, so returns are less affected by currency swings. The key trade-off is that while hedging reduces currency risk, it can also dampen potential gains if exchange rates move in a favorable way for the investor, and it adds costs from implementing the hedge. This is why the best choice emphasizes both the reduction in currency risk and the potential for reduced upside plus additional costs. The other options don’t fit because hedging isn’t limited to CAD exposure alone, funds that hedge can still invest abroad, and hedging does not guarantee a fixed return.

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