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
Date Written: January 17, 2013
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: Suggested Citation