Conditional Hedging and Portfolio Performance

Posted: 22 Mar 2003

See all articles by David VanderLinden

David VanderLinden

University of Southern Maine - School of Business

Christine X. Jiang

Fudan University

Michael Hu

Kent State University - Department of Marketing


Simple conditional currency-hedging rules often increase risk-adjusted portfolio returns and are thus of interest to investors. Several researchers have reported successful application of a "forward hedge rule" (FHR) in which one hedges whenever the foreign currency trades at a forward premium. An alternative strategy, a "real-interest-rate hedge rule" (RIR), is based on hedging when the domestic real interest rate exceeds the foreign rate. As an extension, we propose a combination of these rules — a "real forward hedge rule" (RFHR). We evaluate the performance of the rules for various currency, stock, and bond portfolios from the developed countries. In tests of risk-adjusted returns for 1976-1997, the RFHR significantly outperformed standard benchmarks and often beat the FHR and the RIR. Moreover, results of a simple dominance test for rolling 5- and 10-year periods suggest that the RFHR consistently improves portfolio performance for a U.S. investor.

Keywords: Risk Measurement and Management, Portfolio risk, Portfolio Management, Portfolio construction, Rebalancing, Portfolio Management: Implementation

Suggested Citation

VanderLinden, David and Jiang, Christine X. and Hu, Michael, Conditional Hedging and Portfolio Performance. Available at SSRN:

David VanderLinden (Contact Author)

University of Southern Maine - School of Business ( email )

P.O. Box 9300
Portland, ME 04104
United States

Christine X. Jiang

Fudan University ( email )

School of Management
Shanghai, 200433
862125011085 (Phone)

Michael Hu

Kent State University - Department of Marketing

P.O. Box 5190
Kent, OH 44242-0001
United States

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