Carry Trades and the Performance of Currency Hedge Funds

HKIMR Working Paper No.03/2013

35 Pages Posted: 18 Jan 2013 Last revised: 19 Feb 2013

See all articles by Federico Nucera

Federico Nucera

Bank of Italy

Giorgio Valente

Hong Kong Institute for Monetary and Financial Research (HKIMR)

Date Written: January 17, 2013

Abstract

We investigate the performance and risk of currency hedge funds using a large and unique consolidated currency hedge fund dataset. We find that a substantial number of hedge funds generate returns that exceed foreign exchange risk premia obtained through carry trades. The best alpha-generating funds exhibit a performance that persists over a one-year horizon. This performance persistence is mostly due to compensation for currency risk-taking as there is no strong evidence of remuneration for active management. The results are robust to biases affecting hedge fund returns, alternative carry trade benchmarks and different methodologies used to correct for sample variability.

Keywords: Hedge Funds, Foreign Exchange, Asset Allocation, Funds Performance Evaluation

JEL Classification: F31, F37

Suggested Citation

Nucera, Federico and Valente, Giorgio, Carry Trades and the Performance of Currency Hedge Funds (January 17, 2013). HKIMR Working Paper No.03/2013. Available at SSRN: https://ssrn.com/abstract=2202605 or http://dx.doi.org/10.2139/ssrn.2202605

Giorgio Valente (Contact Author)

Hong Kong Institute for Monetary and Financial Research (HKIMR) ( email )

One Pacific Place, 10th Floor
88 Queensway
Hong Kong
China

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