Abstract
Global portfolio management faces two critical decisions: portfolio selection and currency exposure. A growing number of pension funds have employed currency overlay programs to manage currency risk, but in our survey and interviews, only on closed-end country fund has adopted the currency overlay strategy and was converted to an open-end mutual fund. This article finds that funds invested in Europe are more likely to hedge currency risk, while Latin American funds and country funds invested in South Africa and the Middle East do not use currency hedging. This may be attributed to costly but limited choices of derivative instruments for hedging currency risk in emerging markets. For hedged funds, the most popular of the currency hedging instruments is the forward contract. The findings indicate that the performance of closed-end country and international equity funds, on average, is affected by risk, discount/premium, and currency hedging.
Published Version
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