Share class hedging is a technique by which an investment fund offers a fund share class in a currency other than the fund's base currency and uses currency contracts to reduce the effect of exchange rate movements between the two. A US dollar fund might, for example, offer a euro-hedged class so that euro investors receive a return close to the fund's dollar return, without the gain or loss from the euro-dollar rate.
The hedge is normally a rolling FX forward contract, renewed monthly and resized as money enters or leaves the class, often run by the administrator or a currency overlay manager. Its gains, losses and costs are allocated only to the hedged class in the net asset value calculation. The hedging is never exact: interest rate differences and timing gaps cause the class to drift from the base class. European regulators limit how far a class may be over- or under-hedged.