Review of Quantitative Finance and Accounting, 21: 49–64, 2003
2003 Kluwer Academic Publishers. Manufactured in The Netherlands.
Beneﬁts from Asia-Paciﬁc Mutual Fund Investments
with Currency Hedging
ANDREA L. D
Department of Finance, Villanova University, Villanova, PA 19085, USA, 610-519-6108
WILFRED L. DELLVA
Department of Finance, Villanova University, Villanova, PA 19085, USA, 610-519-7797
JEAN L. HECK
Department of Finance, Villanova University, Villanova, PA 19085, USA, 610-519-4325
Abstract. This study presents empirical evidence on the efﬁciency and effectiveness of hedging U.S.-based
international mutual funds with an Asia-Paciﬁc investment objective. The case for active currency risk management
is examined for a passive and a selective hedge, which is constructed with currency futures in the major currencies.
Both static and dynamic hedging models are used to estimate the risk-minimizing hedge ratio. The results show
that currency hedging improves the performance of internationally diversiﬁed mutual funds. Such hedging is
beneﬁcial even when based on prior optimal hedge ratios. Further, efﬁciency gains from hedging, as measured by
the percent change in the Sharpe Index, are greatest under a selective portfolio strategy that is implemented with
an optimal constant hedge ratio.
Key words: currency hedging, international diversiﬁcation, risk management
JEL Classiﬁcation: G11, G13, G15
As the Asian, Russian and Brazilian ﬁnancial crises subsided, investors began showing re-
newed interest and conﬁdence in emerging markets. Portfolio equity investments into these
economies picked up again after two years of decline reﬂecting in part a global trend toward
increased cross-border ownership. In 1995, U.S investors, particularly pension funds and
mutual funds, stepped up their holdings of Asian emerging markets’ stocks as a result of
$8.3 billion in net purchases and $10.7 billion in price appreciation.
At the same time, the
number of U.S.-based mutual funds investing in Asia increased from 242 to 305, reﬂecting
an increase in net asset value by $2.1 billion to $34.8 billion.
Unfortunately, mutual funds
that invest in foreign stocks expose investors to currency risk as well as market risk. Thus,
for U.S. investors, the returns of foreign investments are inﬂuenced by both the returns
from the foreign securities and by the returns on the currencies in which the securities are