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Mutual Fund Performance and Embedded Currency Risk

Massimo Massa

INSEAD - Finance

Yanbo Wang


Hong Zhang

INSEAD - Finance; PBC School of Finance

March 10, 2012

We document a puzzle that the embedded currency risk in the international mutual fund industry, defined as the currency volatility risk and crisis risk of the benchmark traced by a fund with respect to the base currency of the fund, negatively affects equity selection and fund performance. The puzzle implies that benchmarking and the limits to derivative use may jointly induce fund managers to engage in operational hedge by adjusting the currency weights of its equity portfolio, which distorts equity selection and reduces fund performance. We test three possible operational hedge policies for a complete worldwide sample of international mutual funds: investment weight in the base currency, currency concentration, and currency herding with other fund managers. Our empirical analyses suggest that funds mainly use currency concentration to manage currency risk, and that funds with more concentrated currency portfolios deliver an annualized performance 100–200 basis points lower than those with a less concentrated portfolio.

Number of Pages in PDF File: 53

Keywords: mutual fund, currency risk, portfolio management

JEL Classification: G23, G30, G32

working papers series

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Date posted: March 15, 2012  

Suggested Citation

Massa, Massimo and Wang, Yanbo and Zhang, Hong, Mutual Fund Performance and Embedded Currency Risk (March 10, 2012). Available at SSRN: http://ssrn.com/abstract=2022803 or http://dx.doi.org/10.2139/ssrn.2022803

Contact Information

Massimo Massa
INSEAD - Finance ( email )
Boulevard de Constance
F-77305 Fontainebleau Cedex
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)
Yanbo Wang (Contact Author)
INSEAD ( email )
Boulevard de Constance
F-77305 Fontainebleau Cedex


Hong Zhang
INSEAD - Finance ( email )
1 Ayer Rajah Avenue
+65 6799 5340 (Phone)
+65 6799 5366 (Fax)
PBC School of Finance ( email )
No. 43 Chengfu Road
Haidian district
Beijing, 100083
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