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Carry Trades and the Performance of Currency Hedge Funds

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  • Federico Nucera

    (Prometeia)

  • Giorgio Valente

    (University of Essex and Hong Kong Institute for Monetary Research)

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

Suggested Citation

  • Federico Nucera & Giorgio Valente, 2013. "Carry Trades and the Performance of Currency Hedge Funds," Working Papers 032013, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:032013
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    4. Luo, Ji & Tee, Kai-Hong & Li, Baibing, 2017. "Timing liquidity in the foreign exchange market: Did hedge funds do it?," Journal of Multinational Financial Management, Elsevier, vol. 40(C), pages 47-62.

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    More about this item

    Keywords

    Hedge Funds; Foreign Exchange; Asset Allocation; Funds Performance Evaluation;
    All these keywords.

    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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