N°24-103: Do Funds Engage in Optimal FX Hedging?

Using comprehensive new contract level data (EMIR) for the period 2019-2023, we explore how the FX derivative trading by 2,806 European funds with discretionary hedging mandates compares to a feasible theoretical benchmark of optimal hedging. A minority of funds engage in hedging policies close to the optimal hedging benchmark. The FX derivative trading of most investment funds is partial, unitary (i.e., with a single currency focus), or even currency risk augmenting. Overall, FX derivative trading does not significantly reduce the return risk of the average European investment funds, although optimal hedging strategies could do so without incurring substantial trading costs.