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Fund-Level FX Hedging Redux

Author

Listed:
  • Bräuer, Leonie
  • Hau, Harald

Abstract

Over the past decade, European investment funds have substantially increased their investment in dollar-denominated assets to more than 3.8 USD trillion, which should give raise to substantial currency hedging if US investor have reciprocal currency exposures in their international portfolios. 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 behaviour 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 without incurring substantial trading costs. JEL Classification: E44, F31, F32, G11, G15, G23

Suggested Citation

  • Bräuer, Leonie & Hau, Harald, 2024. "Fund-Level FX Hedging Redux," ESRB Working Paper Series 148, European Systemic Risk Board.
    • Handle: RePEc:srk:srkwps:2024148
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    File URL: https://www.esrb.europa.eu//pub/pdf/wp/esrb.wp148.en.pdf
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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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