To Hedge, Or Not To Hedge

n this thesis I investigate the costs of complying with Dutch pension fund regulation. More specifically, this study investigates whether the benefits of interest rate hedging outweigh the costs by means of a simulation of a general pension fund. The simulation discriminates between periods of economic expansion and slump. I find that in periods of economic downturn a difference in transaction cost expenditures of 8 bps of total fund value exists between funds that maintain a high hedge ratio versus their less hedged counterparts. Furthermore, the gains in fund performance from hedging disappear at longer time horizons. In times of economic upswing the costs of hedging are a factor 5-6 lower compared to periods of economic distress. In such periods, differences in fund performance are tiny. While in times of economic bust regulation could be relaxed, a modest hedge is advised in a boom.