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Currency Management by International Fixed‐Income Mutual Funds

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  • CLEMENS SIALM
  • QIFEI ZHU

Abstract

Investments in international fixed‐income securities are exposed to significant currency risks. We collect novel data on currency derivatives used by U.S. international fixed‐income funds. We document that while 90% of funds use currency forwards, they hedge, on average, only 18% of their currency exposure. Funds' currency forward positions differ substantially based on risk management demands related to portfolio currency exposure, return‐enhancement motives such as currency momentum and carry trade, and strategic considerations related to past performance and fund clientele. Funds that hedge their currency risk exhibit lower return variability, but do not generate inferior abnormal returns.

Suggested Citation

  • Clemens Sialm & Qifei Zhu, 2024. "Currency Management by International Fixed‐Income Mutual Funds," Journal of Finance, American Finance Association, vol. 79(6), pages 4037-4081, December.
    • Handle: RePEc:bla:jfinan:v:79:y:2024:i:6:p:4037-4081
    DOI: 10.1111/jofi.13381
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