As International investors we hold two types of Currency risk: Currency translation risk and Currency Alpha risk.
Failure to make that distinction between these different types of risk can result in significant currency losses.
Currency translation risk is a by-product of foreign investment. Investors may gain diversification benefits by holding foreign assets, but they generally take on the Currency risk without any expectation of adding value to the portfolio. Exchange rate movements may generate losses and gains that may have a significant impact at the total portfolio level.
By contrast, Currency Alpha risk results from active bets in absolute return Currency strategies or Global Macro strategies that aim to profit from differences in Currency rates, interest rates and other macro arbitrage opportunities around the world. Managers of these types of strategies are paid to increase the amount of currency risk in a portfolio, with the objective of generating positive cash flows.