Carry trades and the performance of currency hedge funds

We investigate the performance and risk of currency hedge funds using a large and unique consolidated currency hedge fund data- set. We fi nd that a substantial number of hedge funds generate returns that exceed foreign exchange risk premia obtained through carry trades. The best alpha-generating funds exhibit a perfor- mance that persists over a one-year horizon. This performance persistence is mostly due to compensation for currency risk-taking as there is no strong evidence of remuneration for active man- agement. The results are robust to biases affecting hedge fund returns, alternative carry trade benchmarks and different meth- odologies used to correct for sample variability