Fund-Level FX Hedging Redux

Leonie Bräuer and Harald Hau

No 148, ESRB Working Paper Series from European Systemic Risk Board

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

Keywords: global currency hedging; institutional investors; mean-variance optimization (search for similar items in EconPapers)
Date: 2024-11
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Working Paper: Fund-Level FX Hedging Redux (2024)
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