Global Portfolio Investment and Currency Risk Management in a Low-rate Environment

Ralph Koijen, AQR Capital Management Distinguished Service Professor of Finance and Fama Faculty Fellow,
Wenxin Du, Associate Professor of Finance

The ongoing low interest rate environment globally has created major challenges for asset managers such as mutual funds, pension funds, and life insurance companies in terms of their asset allocation and risk management decisions. The challenges have been particularly acute in jurisdictions with negative yields, such as Europe and Japan.

In this project, we focus on how mutual fund managers and long-term investors (LTIs) domiciled outside respond to the low-rate environment by allocating capital to foreign currency-denominated assets (e.g., US dollar-denominated fixed income securities) in search of better investment opportunities. A central question is how institutions manage currency risk. In addition, given the size of LTIs, commonalities in their hedging strategies may impact exchange rates, currency derivatives, and dollar funding markets.

Read working paper: International Portfolio Frictions

Read working paper: USD Asset Holding and Hedging Around the Globe