Currency Management by International Fixed Income Mutual Funds
72 Pages Posted: 25 Nov 2020 Last revised: 1 Jul 2022
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
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