The Use of Derivatives by Investment Managers and Implications for Portfolio Performance and Risk
48 Pages Posted: 15 Jul 2005
Date Written: July 1, 2005
Abstract
This study provides an empirical examination of derivative instruments used by institutional investors. Our analysis provides a unique insight into the role of derivative securities within portfolios, and the potential benefits from their use. We contribute to the literature using a database that comprises the periodic portfolio holdings and daily trades of active equity managers. The consequence of derivative use is analyzed using a number of performance and risk measures. Overall, we find the use of derivatives have a negligible impact on fund returns. This finding is attributed to low levels of derivative exposure relative to total fund size. We also evaluate how derivatives are used by considering the trading strategies executed by investment managers. The option trading patterns of active institutional investors are shown to be consistent with the execution of momentum trading strategies. The study also documents that active investment managers prefer not to use options markets to engage in informed trading.
Keywords: Derivatives, managed funds, investment performance, portfolio risk
JEL Classification: G11, G23
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Risk Taking by Mutual Funds as a Response to Incentives
By Judith A. Chevalier and Glenn Ellison
-
Mutual Fund Flows and Performance in Rational Markets
By Richard C. Green and Jonathan Berk
-
Mutual Fund Flows and Performance in Rational Markets
By Richard C. Green and Jonathan Berk
-
Career Concerns of Mutual Fund Managers
By Judith A. Chevalier and Glenn Ellison
-
Career Concerns of Mutual Fund Managers
By Judith A. Chevalier and Glenn Ellison
-
The Persistence of Risk-Adjusted Mutual Fund Performance
By Edwin J. Elton, Martin J. Gruber, ...
-
By Judith A. Chevalier and Glenn Ellison
-
Hot Hands in Mutual Funds: the Persistence of Performance, 1974-87
By Darryll Hendricks, Jayendu Patel, ...
-
By Narasimhan Jegadeesh, Hsiu-lang Chen, ...