Investment funds' de facto currency risk exposure

Key takeaways 

• The sensitivity of fund returns to exchange rates, once underlying asset returns are accounted for, provides a measure of funds' exposure to currency risk, ie their de facto hedge ratio.
• Bond funds have high and stable hedge ratios, though with some sensitivity to hedging costs. Equity funds' hedging is volatile and consistent with opportunistic currency speculation.
• In the run-up to April 2025, equity funds with low hedge ratios attracted most inflows and outperformed those with high hedge ratios, but this relation flipped following "Liberation Day".

The views expressed in this publication are those of the authors and do not necessarily reflect the views of the BIS or its member central banks.