Equity Fund Hedging Contributed to Dollar Declines During Liberation Day: BIS

Equity funds outside the US rushed to hedge their dollar exposures when President Trump’s “Liberation Day” announcement threw markets into turmoil in 2025, and in doing so exacerbated the buck’s slide, an analysisfrom the Bank for International Settlements has found.

While bond funds have high and relatively stable hedge ratios, equity funds tend to vary the portion of their assets they protect against FX losses in a way that’s consistent with opportunistic currency speculation. Prior to the shift in trade policy, equity funds that kept their hedge ratios low attracted most inflows and outperformed those with higher protection built in. This flipped following “Liberation Day”.

The shift in behavior was a response to the unexpected depreciation in the greenback triggered by announcements of major changes in US trade policy in April 2025. Investors outside the US, faced with simultaneous losses on their equity holdings and the dollar, rushed to up their hedging ratios, amplifying the dollar’s slide.

“Our results indicate that, within euro area investment funds, the ex-post hedging of US dollar exposures was driven by equity funds, not bond funds,” the BIS says. “In April 2025, the de facto hedge ratio of equity funds jumped from about 0.5 to almost a full hedge, before retracting somewhat.”

In the 12 months since the announcement, hedged equity funds outperformed unhedged ones and due to their lower US dollar exposure, benefited both in terms of higher returns and increased investor inflows, the research finds. The BIS says that the “seemingly myopic and reactive return-chasing behaviour” exhibited by equity fund investors and managers was predicated on expectations of continued dollar strength and its appreciation during times of falling equity prices. This assumption left them vulnerable to simultaneous losses on both asset classes in April last year.

As both the greenback and equities fell sharply, fund managers reacted by rushing to hedge FX exposures via derivatives instead of selling underlying assets, the BIS notes. By selling dollars forward using FX derivatives, they added momentum to the currency’s declines. “The April 2025 market turbulence illustrated that currency hedging policies are crucial to understand market dynamics in stress episodes,” the BIS states.