The End of a Structural Trend

The post-Bretton Woods era saw the Swiss franc appreciate steadily against the US dollar, a reflection of Switzerland’s monetary discipline and global reputation for stability. From the early 1970s through to 2008, CHF/USD followed a relatively clear trendline: the franc gained ground. This history continues to inform investor psychology in Switzerland.

However, the 2008 financial crisis marked a turning point. In response to deflationary pressures and to maintain export competitiveness, the Swiss National Bank (SNB) began actively intervening in currency markets. What followed was a prolonged period of artificial suppression of the franc’s strength. Through a combination of direct market interventions and deeply negative policy rates, the SNB sought to cap CHF appreciation and keep Swiss exports attractive to international buyers.

The result has been a flattening of the long-term CHF/USD trend. The franc has traded within a relatively narrow band, roughly 1.0 to 1.2 USD per CHF, for over a decade. This is no longer a market-driven dynamic, but a policy-managed one.

The Role of Interest Rate Differentials

Since 2008, the United States has maintained structurally higher interest rates compared to Switzerland. While the Federal Reserve’s policy rate has fluctuated between 0% and 5%, the SNB’s policy rate has hovered near zero or even below it, with extended periods of negative rates between 2015 and 2022.

For investors, this interest rate differential is material. Holding USD-denominated assets during this period meant earning a significantly higher yield. By contrast, CHF cash and CHF-hedged assets offered little to no yield, at times, even a negative return on cash deposits. The chart below illustrates this disparity over time.

Evidence from Investment Returns

To isolate the impact of currency exposure and hedging, we examined the same underlying investment—MSCI World ETF (iShares URTH)—in three forms over the period from December 2012 to May 2025 (the longest time frame we have data for all three ETFs):

1. Unhedged USD exposure (performance shown in USD)

2. Unhedged USD exposure (performance translated into CHF)

3. CHF-hedged version of the same ETF

The results are clear:

• The unhedged USD version returned +268.45%.

• The unhedged version in CHF returned +226.74%.

• The CHF-hedged version returned only +200.00%.

Despite modest movements in CHF/USD over the period, the hedged version significantly underperformed due to two primary reasons: the cost of hedging (via forwards or futures) and the lost interest income associated with the USD yield.

Understanding the Cost of Hedging

Hedging is typically achieved through forward contracts, where investors lock in a future exchange rate. These contracts are priced not just on the spot rate, but also on the interest rate differential between the two currencies. In the case of CHF vs. USD, the forward rate adjusts for the fact that USD yields more than CHF.

As the FX Forward Curve (chart above) shows, the longer the hedge duration, the less favorable the forward rate becomes for the CHF-based investor. For example, while the spot rate may be 1.2188, the one-year forward rate might only offer 1.26 CHF/USD. Over longer horizons, this difference accumulates, effectively transferring the USD interest premium to the counterparty in the hedge.

In practical terms, this means Swiss investors who hedge their USD exposure systematically forgo the return advantage that would have accrued from higher-yielding USD assets. Worse, they also incur trading costs such as spreads, rollover fees, and counterparty risk.

The “Safe Way” Isn’t Always Safer

The “safe way,” to hedge your currency exposure, did not result in better returns at all. The premium you needed to pay is not only trading costs, but the interest rate differential between USD and CHF, which currently exceeds 5% p.a.

The franc seems to no longer structurally appreciate. With policy intervention capping its strength and with the SNB having recently widened the gap by cutting rates to 0%, the likelihood of closing it meaningfully remains even lower.

Strategic Implications by Asset Class

Not all asset classes respond the same way to currency risk. The decision to hedge should be guided by the role of the asset in the portfolio and the investor’s liabilities.

Private Equity and Public Equities

For long-term growth-oriented investments such as equities, the case against hedging is strong. Equity returns are driven primarily by capital appreciation, not currency fluctuations. Moreover, equities are volatile, and short-term currency movements tend to be dwarfed by market-driven asset price movements.

Hedging in this context:

• Adds cost,

• Reduces diversification (by anchoring returns to the Swiss franc),

• And removes the long-term compounding benefit of holding higher-yielding currencies.

In practice, the result is a structurally weaker portfolio.

Fixed Income and Private Credit

By contrast, income-generating instruments such as private credit may warrant a different approach. If an investor’s liabilities are in CHF (e.g., retirees drawing regular income), currency fluctuations in USD-denominated cash flows may be undesirable. Hedging may help stabilize CHF income streams.

However, this must be weighed against the cost of hedging. In many cases, the net yield advantage of USD-denominated credit still outweighs the risk-adjusted benefit of stability.

Conclusion

The longstanding Swiss preference for hedging foreign currency exposure—particularly into CHF—is no longer justified by empirical evidence or macroeconomic fundamentals.

• The franc is no longer structurally appreciating.

• Interest rate differentials remain wide and persistent.

• Hedging erodes performance and reduces diversification.

• The cost of hedging reflects both yield sacrifice and transaction drag.

For most investors, especially those focused on growth through equities, hedging USD exposure into CHF is a costly mistake. Where stability is required, such as with short-term fixed income liabilities, hedging can play a role. But even then, the rationale must be clear, and the cost transparent.

Even as a Swiss investor conscious of FX risks, limiting your portfolio to only CHF-denominated instruments is not the answer. The Swiss bond market is relatively small, concentrated in a few industries, select maturities, and higher credit ratings—factors that ultimately reduce diversification and portfolio resilience. A more effective approach is to build a global fixed income portfolio and selectively hedge to CHF where stability is needed.

At Petiole Asset Management AG, we specialize in constructing globally diversified portfolios across private equity, private credit, real estate, and infrastructure. Backed by over 20 years of experience and licensed by FINMA, we offer access to exclusive co-investments and flagship funds typically reserved for institutional investors. Our team works closely with each client to design tailored investment programs aligned with long-term objectives and risk appetite.

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