Carry Trades and the Performance of Currency Hedge Funds

Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 03/2013

Journal of International Money and Finance, Volume 33, March 2013, Pages 407-425

35 Pages Posted: 18 Jan 2013 Last revised: 28 Jul 2022

Date Written: January 17, 2013

Abstract

This working paper was written by Federico Nucera (Prometeia) and Giorgio Valente (University of Essex and Hong Kong Institute for Monetary Research).

We investigate the performance and risk of currency hedge funds using a large and unique consolidated currency hedge fund dataset. We find that a substantial number of hedge funds generate returns that exceed foreign exchange risk premia obtained through carry trades. The best alpha-generating funds exhibit a performance that persists over a one-year horizon. This performance persistence is mostly due to compensation for currency risk-taking as there is no strong evidence of remuneration for active management. The results are robust to biases affecting hedge fund returns, alternative carry trade benchmarks and different methodologies used to correct for sample variability.

Keywords: Hedge Funds, Foreign Exchange, Asset Allocation, Funds Performance Evaluation

JEL Classification: F31, F37

Suggested Citation

Institute for Monetary and Financial Research, Hong Kong, Carry Trades and the Performance of Currency Hedge Funds (January 17, 2013). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 03/2013, Journal of International Money and Finance, Volume 33, March 2013, Pages 407-425, Available at SSRN: https://ssrn.com/abstract=2202605 or http://dx.doi.org/10.2139/ssrn.2202605

Hong Kong Institute for Monetary and Financial Research (Contact Author)

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