Currency Management by International Fixed Income Mutual Funds

Abstract

Investments in international fixed income securities are exposed to significant currency risks. We collect novel data on mutual fund currency derivatives and document that over 90 percent of U.S. international fixed income funds use currency forwards to manage their foreign exchange exposure. Fund currency strategies differ substantially based on risk management demands related to the currency denominations, speculative demands such as currency momentum and carry trade, and incentives related to past performance and fund clienteles. Funds that hedge their currency risk exhibit lower return variability, but do not generate inferior risk-adjusted returns.

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

JEL Classification: F31, G15, G23, G32