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On the Use of Currency Forwards: Evidence from International Equity Mutual Funds
Using a novel, hand-collected dataset of over 55,000 net currency forward positions, we provide the first large-scale empirical study of currency management in US international equity mutual funds. Although some funds hedge currency exposure, many construct separate "shadow" currency portfolios with long- and short-derivative positions, often in currencies unrelated to their equity holdings. Surprisingly, we find that both approaches have a limited impact on overall fund performance, largely due to suboptimal implementation. Furthermore, non-user funds could have materially improved risk-adjusted returns through dynamic currency hedging. Our findings highlight inefficiencies in currency management and offer insight into optimizing portfolio performance.
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