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Carry trades and the performance of currency hedge funds

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  • Nucera, Federico
  • Valente, Giorgio

Abstract

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.

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  • Nucera, Federico & Valente, Giorgio, 2013. "Carry trades and the performance of currency hedge funds," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 407-425.
  • Handle: RePEc:eee:jimfin:v:33:y:2013:i:c:p:407-425 DOI: 10.1016/j.jimonfin.2012.12.001
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    Cited by:

    1. Gueorgui Konstantinov, 2016. "Capturing short-term and long-term alpha of global bond portfolios: evidence from EUR-investors’ perspective," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 30(3), pages 337-365, August.
    2. Ahmed, Shamim & Liu, Xiaoquan & Valente, Giorgio, 2016. "Can currency-based risk factors help forecast exchange rates?," International Journal of Forecasting, Elsevier, vol. 32(1), pages 75-97.
    3. repec:eee:mulfin:v:40:y:2017:i:c:p:47-62 is not listed on IDEAS

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    Keywords

    Hedge funds; Foreign exchange; Asset allocation; Funds performance evaluation;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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