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Fund-Level FX Hedging Redux

Author

Listed:
  • Leonie Bräuer

    (University of Geneva; Swiss Finance Institute, Students)

  • Harald Hau

    (University of Geneva)

Abstract

Using comprehensive new contract level data (EMIR) for the period 2019-2023, we explore how the FX derivative trading by European funds compares to a feasible theoretical benchmark of optimal hedging. We find that hedging behavior by all fund types is often partial, unitary (i.e., with a single currency focus), and sub-optimal. Overall, the observed FX derivative trading does not significantly reduce the return risk of the average European investment funds, even though optimal hedging strategies could do so without incurring substantial trading costs.

Suggested Citation

  • Leonie Bräuer & Harald Hau, 2024. "Fund-Level FX Hedging Redux," Swiss Finance Institute Research Paper Series 24-103, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp24103
    as

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    References listed on IDEAS

    as
    1. Harald Hau & Massimo Massa & Joel Peress, 2010. "Do Demand Curves for Currencies Slope Down? Evidence from the MSCI Global Index Change," The Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1681-1717, April.
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    More about this item

    Keywords

    Global Currency Hedging; Institutional Investors; Mean-Variance Optimization;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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