Dollar Asset Holdings and Hedging Around the Globe

We analyze a large number of industry- and company-level filings of global institutional investors to provide the first comprehensive estimate of foreign investors' U.S. dollar (USD) security holdings and currency hedging practices. We document four stylized facts. First, driven by increasing portfolio allocations, foreign investors expanded their USD security holdings six-fold over the past two decades. Second, following the 2007-09 financial crisis, foreign mutual funds, insurers, and pensions raised their USD hedge ratio by an average of 15 percentage points, despite higher hedging costs implied by large and persistent deviations from covered interest-rate parity. The total FX hedging demand from these sector reached $2 trillion in 2019. Third, there is considerable heterogeneity in hedging practice across countries and sectors. Fourth, the global banking sector provides limited dollar hedging on net, underscoring the important role non-banks play in fulfilling the hedging demand of foreign institutional investors. We employ a mean-variance framework to benchmark investors' demand for USD assets and currency hedging practice, emphasizing the influence of expected returns on optimal portfolio construction and the apparent divergence between model predictions and observed hedging behaviors. We show a strong correlation between hedging demand and the cross-section of CIP deviations.