44 Pages Posted: 15 Mar 2012 Last revised: 31 Oct 2014
Date Written: March 10, 2012
We show that the currency risk embedded in the benchmarks of international mutual funds negatively affects fund performance. More specifically, a high benchmark-implied currency risk induces funds to invest in markets with less volatile currencies, leading to a higher degree of currency concentration in portfolio holdings. This currency concentration, however, departs from the optimal equity allocation strategy across countries and reduces fund performance. We document that funds resorting to high currency concentrations underperform funds with low currency concentrations by as much as 1% to 2% per year.
Keywords: mutual fund, currency risk, portfolio management
JEL Classification: G23, G30, G32
Suggested Citation: Suggested Citation
Massa, Massimo and Wang, Yanbo and Zhang, Hong, Benchmarking and Currency Risk (March 10, 2012). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2022803 or http://dx.doi.org/10.2139/ssrn.2022803
By David Blitz