How do Global Portfolio Investors Hedge Currency Risk?

We study how institutional investors hedge foreign exchange risk using more than 25 years of monthly portfolio data from a global custodian, matching asset holdings with FX forward positions for U.S.- and non-U.S.-based investors. Fixed-income investors hedge more than equity investors, non-USD investors hedge more than USD investors, and hedging has risen markedly since 2008. Many investors appear to target and rebalance toward stable hedge ratios. Hedge ratios are related to carry, volatility, and FX momentum, but they are far from risk-minimizing benchmarks. Overall, hedging has increased across domiciles and asset classes, with important implications for currency demand and portfolio management.