US investors who bought the main European stock index a year ago should be looking at a more than 10 percent return, but without protection against a falling euro, all of that profit - and more - would have been wiped out.
The return of big, often unpredictable exchange rate moves is prompting equity investors - who, unlike bond investors, have traditionally not insured themselves against currency risk - to turn again to specialist managers to safeguard their profits with so-called currency overlay strategies.
A currency overlay manager removes the exchange rate risk by opening and closing forward contracts on the currencies to which an investor is exposed.
The strategy became popular in the mid-2000s as foreign investors in US equities hedged against a sharply weakening dollar. But it took a hammering during and after the financial crisis, when the dollar's fall abated and it became more difficult to exploit the differences between major currencies as interest rates converged towards zero.
Now it's back, data from some of the largest currency overlay providers shows.
Record Currency Management, the world's biggest independent currency manager and the first to provide an overlay strategy in the mid-1980s, saw its assets under management top their pre-crisis peak this year, hitting a record $56.6 billion in June.
And investment managers tracked by data provider eVestment have seen inflows of $2.3 billion into currency overlay strategies so far this year, compared with outflows of $829 million in 2014.
"We've got an environment of more volatility, we've had the ... emergence of big events and big spikes in the market driven by those events. That is making investors more aware of how much volatility currency is contributing to their returns," said Record CEO James Wood-Collins.
The firm lost almost half its funds under management between 2008 and 2009 as interest rate compression and risk aversion drove investors to unwind the "carry" trades - where investors borrow a low-yielding currency and sell it to buy a higher-yielding but riskier one - that Record specialised in.
This time most risk-wary investors using overlay strategies simply want to hedge their currency exposures, rather than seek extra return by taking bets on currencies - an inherently risky strategy in a market that is a zero-sum game.
Wood-Collins said only around 10 percent of his clients were using return-seeking strategies, compared with around half before the financial crisis.
Another change is that US investors are driving much of the growth. Having traditionally invested mostly domestically, many diversified into foreign assets during the dollar's 40 percent decline between 2001 and 2008, when it paid for them to be invested abroad with no hedge.
But with the dollar trading near 12-year highs and expected to strengthen further, those investors are vulnerable to big losses from their underlying currency exposure.
An estimated $1 trillion in US pension fund assets was lost in this way in the nine months to July.
Jeremy Schwartz, New York-based ETF provider WisdomTree's research director, 90 percent of whose clients are from the United States, said stocks often do better in markets whose currencies are weakening, so it made sense to hedge.
Schwartz said WisdomTree had experienced big inflows into hedged ETFs this year.
London-based Millennium Global, another big currency manager, saw inflows of $3.5 billion this year, after four years of inflows of under $1 billion. $1.5 billion of this year's growth was from US pension funds.
"It's almost like a Buddhist awakening - people have realised that they've got two sources of risk and return," said Millennium CEO Mark Astley.
"They've always worried about managing the equity side, but now they realise they'd better manage the currency side too."
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