The Bank for International Settlements published a BIS Bulletin analysing euro area investment funds’ de facto exposure to US dollar currency risk by estimating how fund returns move with exchange rates after controlling for underlying US asset returns. It finds a sharp split across fund types: bond funds maintain high and stable hedge ratios close to full hedging, while equity funds’ hedge ratios are typically lower, much more volatile and consistent with opportunistic currency speculation. The study infers fund-level hedge ratios from exchange-rate sensitivity using two-stage regressions and aggregates results from a large weekly sample (around 1,700 funds on average, drawn from an unbalanced panel of roughly 3,400 funds over 10 years) covering euro-denominated fund shares investing in US bonds and equities. Bond funds’ hedging varies mainly with hedging costs and a stronger dollar, reflecting the direct impact of FX hedging costs on fixed income returns, whereas equity funds’ hedge ratios co-move with non-commercial currency futures positioning and at times imply over-hedging (up to about 1.6). Around the 2 April 2025 “Liberation Day” episode, equity funds entered with large unhedged dollar exposure and then rapidly increased hedging ex post, selling dollars forward in FX markets in a way the authors argue likely amplified the dollar’s depreciation, while bond fund hedge ratios remained comparatively stable. The Bulletin also links currency hedging to investor flows and relative performance: in the run-up to April 2025, equity funds with low hedge ratios attracted the most inflows and outperformed those with higher hedge ratios, but this relationship reversed after the shock, with more highly hedged equity funds subsequently outperforming and receiving stronger inflows.
Bank for International Settlements 2026-04-22
Bank for International Settlements research finds bond funds largely fully hedge currency risk while equity funds hedge opportunistically and amplified April 2025 dollar moves
The Bank for International Settlements published a BIS Bulletin on euro area investment funds’ US dollar risk, finding bond funds keep high, stable hedge ratios near full hedging, while equity funds’ ratios are lower, more volatile and consistent with opportunistic speculation. Bond fund hedging is driven mainly by hedging costs and dollar strength, whereas equity fund hedging co-moves with non-commercial currency futures positioning and sometimes implies over-hedging. Equity funds’ rapid ex post hedging around the 2 April 2025 “Liberation Day” episode likely amplified dollar depreciation. Before April 2025, low-hedged equity funds outperformed and drew stronger inflows, but this reversed after the shock in favour of more highly hedged funds.