(Image credit: Future)How currency hedged funds workTo understand why even a currency hedged fund won’t insulate us from currency movements completely over the long term, it’s useful to think about how funds hedge currency exposure. Hedging means using forward contracts to lock in the exchange rate at which the investor will buy or sell a certain amount of the currency on a future date. Of course, the exchange rate that is locked in will not be the same as today’s exchange rate. So a currency hedged fund typically enters into a series of short-term forwards, which it continually rolls over. This certainly helps smooth out currency volatility – but in a world in which interest-rate expectations and hence forward exchange rates become more volatile, it may not always work as well as investors expect.