Superannuation funds had a good year in 2009 with the median-performing balanced option (where most people have their money) returning 12.9 per cent, according to SuperRatings. The result is almost entirely due to the contribution made by Australian shares.

There was the tiniest contribution from global shares even though global shares were 28 per cent higher over the year. So how can that be?

It's because of the strong Australian dollar and the fact that super funds hedge only half their currency exposure.

The typical balanced fund has about one-third of its money in Australian shares. As this segment rose by more than 30 per cent last year, it contributed about a third of that (10 per cent) to the 12.9 per cent return.

But a typical balanced fund also invests about 20 per cent of its money in global shares, of which half is in US equities, making the relationship between the Aussie dollar and the US dollar important.

When the Aussie dollar appreciated strongly against the greenback last year (and against most other major currencies), funds that were only half hedged for currency risk took a hit, leaving little in the way of returns.

Funds could hedge 100 per cent but currency is a double-edged sword. Just as an appreciating Australian dollar detracts from the returns on international shares, a depreciating dollar adds to returns.

In 2008, when the Australian dollar was falling against most major currencies, it helped cushion the falls on overseas sharemarkets.

The Australian dollar is a commodities currency. When the outlook for the global economy is upbeat, commodity prices rise and so does the Aussie dollar. At the start of 2009, it was worth about 65 US cents and by the end of the year it was worth about 95 US cents.

The asset consultants who advise super fund trustees on currency-hedging strategies prefer to take the 50-50 route because they know exchange rate movements are unpredictable and volatile and that, over time, they tend to cancel out. And super is, of course, a very long-term investment. Over a 20- or 30-year period, the Australian dollar will trade over a wide range of exchange rates.

There is also a cost to members of hedging. While most funds hedge about 50 per cent, or a little lower, some funds are fully hedged and some do without hedging altogether. The hedging policy is even more important for members who choose their super fund's investment option that concentrates on international shares only. Over one or two years, the hedging policy of these single-sector options can dictate whether the option is at the top or the bottom of the performance tables.

The managing director of Superratings, Jeff Bresnahan, says trustees of super funds have a responsibility, particularly on their balanced investment options, to actively manage currency hedging because of the big difference it can make to returns.

Most consumers do not understand hedging but if they did, they would have an expectation that the trustees were paying attention to it rather than leaving it as a set-and-forget thing.

Most economists think we are likely to have a high Australian dollar for some time. Drivers for the higher currency include the higher interest rate on offer in Australia for overseas investors and the relatively strong Australian economy, thanks to the ongoing resources boom.

That means the Australian dollar may go higher against the US dollar over the long term. In recent weeks, however, it has fallen against the greenback, adding to the returns on the unhedged portion of a fund's international shares allocation. Asset consultant Mercer, for one, believes the Australian dollar will fall relative to the US dollar over the the next two to three years.