We analyze U.S. bond funds’ currency forward positions and document that the currency risk exposure of foreign investors in emerging markets (EM) is substantially greater than the estimates based on bond holdings alone, and varies by fund objectives. Unique to emerging markets, funds use forwards to overcome capital control and reduce portfolio deviations from benchmarks, effectively taking directional exposure in the forward market. These findings motivate an equilibrium model featuring investor heterogeneity, inelastic hedging demand, capital control and forward market segmentation. The model rationalizes key empirical regularities in EM currency forward premia and highlights the impact of policy barriers.