Currency Risk and the Government Pension Fund Global

Abstract

The Government Pension Fund Global (GPFG) in Norway is a sovereign wealth fund with an international portfolio only invested in foreign securities. This paper aims to evaluate the currency exposure of the fund and assess how currency risk hedging impacts its performance. We find that the investments in assets denominated in foreign currencies expose the fund to an increased currency risk in terms of volatility. Although our out-of-sample strategies consistently manages to reduce portfolio risk, they do not provide any statistically significant changes in Sharpe ratio due to decreases in the average returns. We also observe that skewness typically worsens, and that kurtosis consistently increases. Only one strategy seems to provide a positive overall impact on portfolio performance. The hedge manages to reduce volatility and increase average return at the same time. Although it increases kurtosis, we only observe a marginal deterioration in skewness. Our results suggest that it may exist a strategy that could improve portfolio performance, but the results are not strongly statistically significant. Yet, the study does reveal a potential for currency risk hedging and points towards areas for improvement. KEYWORDS: sovereign wealth fund, currency risk exposure, currency hedge, portfolio management, risk management.