Currency Management by International Fixed Income Mutual Funds

72 Pages Posted: 25 Nov 2020 Last revised: 1 Jul 2022

See all articles by Clemens Sialm

Clemens Sialm

University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER)

Qifei Zhu

Nanyang Business School, Nanyang Technological University

Date Written: July 19, 2021

Abstract

Investments in international fixed income securities are exposed to significant currency risks. We collect novel data on currency derivatives used by U.S. international fixed income funds. We document that while 90% of funds use currency forwards, they hedge, on average, only 18% of their currency exposure. Funds' currency forward positions differ substantially based on risk management demands related to portfolio currency exposures, return-enhancement motives such as currency momentum and carry trade, and strategic considerations related to past performance and fund clienteles. Funds that hedge their currency risk exhibit lower return variability, but do not generate inferior abnormal returns.

Keywords: currency risk, forward contracts, mutual funds, fixed-income securities, performance

JEL Classification: F31, G15, G23, G32

Suggested Citation

Sialm, Clemens and Zhu, Qifei, Currency Management by International Fixed Income Mutual Funds (July 19, 2021). Nanyang Business School Research Paper No. 20-29, Available at SSRN: https://ssrn.com/abstract=3732286 or http://dx.doi.org/10.2139/ssrn.3732286

Clemens Sialm (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/Clemens.Sialm/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Qifei Zhu

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

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