Question on FX active management

[Maikhan]

This is something that doesnt make much sense to me in real life. Having traded FX in the past for a total return bond fund, if we left say a european bond exposure “unhedged” it was essentially a long position in that currency and is hence active currency management. If we hedged the exposure back to the USD, theres no currency exposure and hence doesnt require currency expertise. However, the CFAI curriculum and this Q seems to point to the opposite. A currency manager with no directional views on an FX wiill hedge it back to the domestic currency. So why is it that “hedging” is considered active currency management and leaving unhedged FX exposures to EUR and GBP is not?

In fact, I found a similar question in the CFAI ecosystem:

If the manager thinks FX markets are efficient, why should the manager leave the exposure unhedged, hence leaving the portfolio susceptible to FX risk instead of hedging the exposure and eliminating the risk?

[S2000magician]

For the first question, we do not know whether the benchmark hedges currency exposure or not (on the real exam they will tell you this explicitly; welcome to the world of third-party mock exams), but from the analysis for Manager 2, it appears that the benchmark is unhedged. So, Manager 2’s the correct answer.

I don’t see anywhere that it describes Manager 1’s or Manager 3’s position as active, nor Manager 2’s as passive. What are you reading that I’m missing?

For your second question, the use some unfortunate (i.e., sloppy) language. She should hedge 0% not because it’s active or passive (it’s active), but because hedging costs money which, in the long run, she believes will buy her not benefit.