http://news.morningstar.com/cover/video ... ?id=813867
The above link from morningstar.com isn't about currency hedging, but it makes some good comments about it.
"most international stocks are more volatile principally because they are traded in foreign currencies. And that currency risk, when you invest in a European stock, for example, is the source of the added volatility...
So, if I'm an investor and I'm concerned about that risk, that extra volatility, I have one of two options. Either, one, I could invest in a currency-hedged stock fund that basically tries to mitigate some of those currency effects, in which case I may be able to bring the risk profile on to par with what I might have in the U.S.; or I could leave that currency risk unhedged but keep my allocation to foreign stocks at a more modest percentage of my overall portfolio.
Now, even though it is true that the unhedged stock returns of foreign stocks are more volatile than U.S stocks, because they are not perfectly correlated with U.S. stocks, if I combine foreign stocks with U.S. stocks in a portfolio, it may actually help slightly mitigate the overall volatility of that portfolio. But again, if you're going to leave the currency risk unhedged, it's best to leave that foreign exposure at a smaller percentage of your portfolio, if you are concerned about that overall volatility...
...did a bit of research on this to try to find what the optimal allocation would be if I was looking at reducing my overall portfolio volatility. And what I found was that using data from 1970 until March of 2017 a 33% allocation to non-U.S. stocks would have resulted in the maximum volatility reduction for the overall portfolio. Now, that maximum volatility reduction was pretty modest. It was about 5%. But still, there are some benefits beyond just that volatility reduction that you would get from going abroad...But I found that you can actually still get most of the volatility reduction benefits with even a smaller allocation than that. So, a 20% allocation to non-U.S. stocks would have given you about 84% of that maximum volatility reduction...
Now, if I were to hedge out my currency risk, it would require a larger allocation to non-U.S. stocks to achieve the maximum volatility reduction. But the maximum volatility reduction is even greater there because I have reduced the volatility of that non-U.S. stock portion of the portfolio. So, I did some research on this as well and I found that about a 30% allocation to non-U.S. stocks with a currency-hedged portfolio would have given you about three fourths of the total volatility reduction that you could have achieved with a currency-hedged portfolio"
That's advice for US investors. Most would agree that for Canadian investors, maximal volatility reduction tends to occur with around 66% foreign stock exposure. And that's unhedged exposure. If you hedge, it looks like it should be higher. How much higher, I don't know.
Volatility is one measure of risk associated with foreign currency exposure. What happens in stock bear markets is another. And in such markets, the Canadian dollar tends to go down, which increases the drawndown. But the $US and the euro tend to go up, which does the opposite.
I'm going to leave my foreign currency exposure unhedged.