Understanding Currency Overlay Strategies

A large institutional investor manages a diversified portfolio that includes international equities, fixed income, and alternative investments. The portfolio is primarily denominated in USD but has significant exposure to foreign currencies, including the Euro (EUR) and Japanese Yen (JPY). Due to increased volatility in foreign exchange markets, the investor is considering the implementation of a currency overlay strategy.

Explain the concept of currency overlay and discuss how it can mitigate foreign exchange risk in the context of the investor's portfolio. Additionally, evaluate the potential benefits and drawbacks of implementing such a strategy for the investor.