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New Statistic on Investment Funds' Currency Exposure and Hedging
Today Danmarks Nationalbank has published a new statistic on investment funds’ currency exposure and hedging. When investment funds purchase e.g. American stocks and bonds, they simultaneously become exposed to the currency risk associated with fluctuations in the dollar's exchange rate against the Danish krone. To reduce that currency risk, investment funds can hedge parts of their currency exposure with e.g. FX forward contracts. The new statistic shows exposure and hedging for the dollar, euro, and other currencies for funds primarily aimed at households (so-called UCITS funds). Additionally, the statistic shows which currencies a hedged exposure is hedged to: kroner, euro, dollar, or other currencies. Generally, the investment funds’ exposure from foreign stocks is only modestly hedged, whereas the exposure from foreign bonds is almost fully hedged.
Investment funds hedge 17 per cent of dollar investments
Note:
Investment funds’ total dollar exposure shown as uncovered exposure and hedging to euros, kroner, and other currencies. The hedge ratio indicates the total share of the hedged dollar exposure. The hedge ratio is denoted on the right axis. Data only includes UCITS funds. Find chart data in the Statbank.
Hedging of dollar and euro exposures
The investment funds hedge 17 per cent of dollar investments, while 27 per cent of euro investments are hedged. The larger hedge ratio of euro investments is due to a significant portion of the investments in euros being in bond funds, which generally hedge their investments to a greater extent than equity funds and mixed funds. Conversely, the majority of dollar investments are in equity funds, which hedge their investments to a lesser extent.
Investments in foreign currencies can be hedged to Danish kroner or other currencies, primarily euros. Dollar investments in particular are sometimes hedged to euros, where the currency risk is considered hedged due to the fixed exchange rate policy. Euro investments are mainly hedged directly to Danish kroner.
Euro investment are hedged to kroner
Note:
Investment funds’ total euro exposure shown as uncovered exposure and hedging to dollars, kroner, and other currencies. The hedge ratio indicates the total share of the hedged euro exposure. The hedge ratio is denoted on the right axis. Data only includes UCITS funds. Find chart data in the Statbank.
Significant difference in hedging behaviour
Equity funds hedge almost none of their dollar and euro investments, while mixed funds hedge just under 20 per cent of both currencies. Bond funds hedge almost all of their investments in dollars, but only 45 percent of their investments in euros, where the currency risk is limited due to the fixed exchange rate policy. There may be several reasons for differences in hedging between equity funds and bond funds. Equity investments are associated with a generally greater price risk than bonds, where currency risk constitutes a smaller part of the overall risk for equities compared to bonds. At the same time, bond funds typically strive to deliver a stable and predictable return.
Investment funds hedge more bonds than stocks
Note:
Investment funds’ hedge ratio of dollars and euro. The hedge ratio is partitioned by fund type and covers the total hedging to all currencies. Mixed funds invest in both equity and bonds. Data only includes UCITS funds. Find chart data in the Statbank.
Investment funds hedge less than insurance and pension companies
The new statistic on the investment funds' currency exposure and hedging is comparable to a similar statistic for the insurance and pension sector. Investment funds hedge a smaller overall proportion of both their dollar and euro investments compared to the insurance and pension sector. The insurance and pension sector hedges approximately 35 per cent of their euro investments and about 70 per cent of their dollar investments. In contrast to investment funds, insurance and pension companies do not differentiate their currency hedging by equities and bonds. They view all their foreign currency investments more as a single portfolio, which is hedged to ensure their customers' pension payments in kroner.
BOX 1
New statistic on investment funds' currency exposure and hedging
Investment funds report their exposure from assets in foreign currencies, and how much of the exposure is hedged to another currency on a monthly basis. The hedging is reported at the contract level. Danmarks Nationalbank calculates the investment funds' currency exposure and currency hedging based on this information. This calculation follows the same principles that apply to the insurance and pension sector.
In the statistic, currency exposure and hedging are distributed by dollars, euros, and other currencies. Currency exposure is primarily derived from the funds' assets on the balance sheet that are denominated in currency. Additionally, currency exposure can stem from the currency hedging itself.