Greger L, Scholz H (2023)
Publication Language: English
Publication Type: Other publication type
Publication year: 2023
URI: https://ssrn.com/abstract=4565638
DOI: 10.2139/ssrn.4565638
Open Access Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4565638
We analyze how currency hedging of currency-hedged equity funds affects their alphas and estimate the impact of the return contribution of currency hedging on their fund flows. Measuring fund manager skill based on common factor models, the factors should capture returns of known strategies, e.g. investing in value stocks. However, currency hedging activities of currency-hedged funds are not captured by common factor models. By introducing a currency hedging return factor, we show how to account for the hedging of these funds in factor models, which helps to generate a more reasonable alpha. In our empirical analyses, we use a sample of ”twin share classes” that invest in the same underlying portfolio but differ in terms of their hedging behavior: One has a currency hedging designation and the other does not. We show that the introduced factor captures returns from currency hedging. Studying fund flows, we decompose the return of currencyhedged funds to derive two different estimates for alpha, one with and one without hedging adjustment, as well as an estimate for the return from currency hedging. Our results indicate that the return contribution of the fund’s currency hedging strategy drives fund flows in addition to manager’s skill.
APA:
Greger, L., & Scholz, H. (2023). Currency-Hedged Equity Funds: Performance and Fund Flows.
MLA:
Greger, Lukas, and Hendrik Scholz. Currency-Hedged Equity Funds: Performance and Fund Flows. 2023.
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