Benefits of Currency Overlay Strategy

Consider a global investment manager who employs a currency overlay strategy to manage currency risk in their portfolio of international equities. The primary objective of the currency overlay strategy is to enhance returns while controlling for currency fluctuations that can impact the values of the investments.

As part of this strategy, the manager decides to utilize both long and short positions in currency forwards to hedge against anticipated changes in exchange rates. In evaluating the effectiveness of various currency overlay strategies, the manager must assess the impacts on overall portfolio risk and return.

What is the primary benefit of employing a currency overlay strategy compared to a traditional passive approach to currency management?