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Is it possible to diversify investment in ISA by buying foreign currency, funds denominated in other currency than GBP, or other investment product that can hedge GBP value moves?

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You have to check if the investment vehicle you are planning to buy is acceptable for ISA on a case by case. Then if it is allowed by HMRC you have to check that your ISA provider offers those products (the mainstream providers might offer a more limited range of products and you might have to go to change your provider)

  • If you are buying funds, check in the documentation that they are ISA compliant. There are plenty of funds sold in the UK invested outside the UK in investment denominated in other currencies than GBP (with sometime a currency hedged).
  • You can also buys directly shares from some international stock exchanges. The stock exchange has to be approved by HMRC (list of stock exchanges approved is here : https://www.gov.uk/recognised-stock-exchanges). Check if you ISA provider offers this facility AND most importantly check the fees. My broker (TD) offers this but this comes at a cost so you might be better offer buying funds or trackers.
  • Bonds are usually OK as well
  • Not sure about the rest. My sense if that derivatives, foreign currencies are not allowed. Check with the HMRC help line https://www.gov.uk/individual-savings-accounts
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Just buy a FTSE-100 tracker. It's cheap and easy, and will hedge you pretty well, as the FTSE-100 is dominated by big mining and oil companies who do most of their business in currencies other than sterling.

  • Currently I have some Vanguard LifeStrategy in GBP, which I believe is pretty cheap, easy and diversified. What if I wanted more exposure to USD changes? Some fund supermarkets offer funds in USD, but are there any cheap index funds/ETFs in USD? – PiotrR Mar 14 '15 at 17:57
  • @PiotrR why the need to have a fund denominated in $ you will have to pay the currency conversion costs on top of the fund management – Pepone Apr 3 '15 at 11:40

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