How Are Derivatives Used? Evidence from the Mutual Fund Industry

Koski, Jennifer L.; Pontiff, Jeffrey

doi:10.1111/0022-1082.00126

Cited by 363 publications

(251 citation statements)

References 33 publications

(43 reference statements)

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“…They document that roughly 70% of mutual funds explicitly state (in Form N-SAR that they file with the SEC) that they are not permitted to sell short. Koski and Pontiff (1999) find that 79% of equity mutual funds make no use of derivatives whatsoever (either futures or options). Anecdotal evidence suggests that pension funds also stay away from derivatives and CDS.…”

Section: Market Segmentation and Price Observabilitymentioning

confidence: 99%

Speculation and Hedging in Segmented Markets

Goldstein

Yang

2012

SSRN Journal

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We analyze a model in which traders have different trading opportunities and learn information from prices. The difference in trading opportunities implies that different traders may have different trading motives when trading in the same market-some trade for speculation and others for hedging-and thus they may respond to the same information in opposite directions. This implies that adding more informed traders may reduce price informativeness and therefore provides a source for learning complementarities leading to multiple equilibria and price jumps. Our model is relevant to various realistic settings and helps to understand a variety of modern financial markets. (JEL G14, G12, G11, D82)

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Section: Market Segmentation and Price Observabilitymentioning

confidence: 99%

Speculation and Hedging in Segmented Markets

Goldstein

Yang

2012

SSRN Journal

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“…One reason for restricting a fund's flexibility is to minimize agency costs by preventing the manager from strategically altering the fund's risk to increase his own compensation (Almazan et al (2004)). 9 Another reason for allowing a fund flexibility is to reduce transaction costs, liquidity costs, and 7 opportunity costs of holding cash (rather than to enhance performance) (Koski and Pontiff (1999), Deli and Varma (2002)). We contribute to this strand of literature by demonstrating that a certain type of investment flexibility, by which managers use hedge fund trading strategies per their prospectuses, can actually enhance fund performance.…”

Section: Related Literaturementioning

confidence: 99%

“…HFs and TMFs, three other studies have examined the rationale behind allowing mutual fund managers flexibility in implementing investment strategies (Koski and Pontiff (1999), Deli andVarma (2002), andAlmazan, Brown, Carlson, andChapman (2004)). This flexibility typically enables the manager to use derivative contracts, invest in restricted securities, sell securities short, and/or borrow money to create leverage.…”

mentioning

confidence: 99%

Hedge Funds for Retail Investors? An Examination of Hedged Mutual Funds

Agarwal

Boyson

Naik

2009

J. Financ. Quant. Anal.

131

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes.You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. licence. www.econstor.eu If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated AbstractRecently there has been a rapid growth in the assets managed by "hedged mutual funds" -mutual funds mimicking hedge funds strategies. In this paper, we examine the performance of these funds relative to hedge funds and traditional mutual funds. We find that despite their use of similar trading strategies, hedged mutual funds underperform hedge funds. We attribute this evidence to lighter regulation and better incentives faced by hedge funds. In contrast, hedged mutual funds outperform traditional mutual funds. Most interesting, this superior performance is largely driven by managers with experience in implementing hedge fund strategies. Our findings have important implication for investors seeking hedgefund-like payoffs at a lower cost and within the comfort of a regulated environment. Hedge funds for retail investors? An examination of hedged mutual fundsFairly recently, a number of mutual fund companies have begun offering funds that use hedge-fund-like trading strategies designed to benefit from potential mispricing on the long as well as the short side. Recognizing that these funds are unique, Morningstar and Lipper have created the new style categories of "Long/Short Equity" and "Market Neutral" to classify these funds. Despite their use of hedge fund strategies, these "hedged" mutual funds are regulated by the Securities and Exchange Commission (SEC) in exactly the same way as "traditional" mutual funds. They are available to retail investors, with an average required minimum investment of just $5,000, while hedge funds are only available to accredited and/or qualified investors with a minimum investment of roughly $1 million. 1 We believe that hedged mutual funds will play an increasingly important role in the field of investment management as they provide access to hedge-fund-like strategies with the fee structure, liquidity, and regulatory requirements of mutual funds.2 This paper conducts an indepth analysis of this new class...

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“…Allayannis and Ofek (2001) relate derivatives use to the foreign exchange rate exposure of a sample of 378 U.S. non-financial firms and find that the use of derivatives significantly reduces the exposure of the sample firms to exchange rate risk. In work on mutual funds, Koski and Pontiff (1999) show that users of derivatives have similar risk exposure and return performance to nonusers.…”

Section: Frequency and Effect Of Derivative Use By Firmsmentioning

confidence: 99%

The Effects of Derivatives on Firm Risk and Value

2009

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Using a sample of 6,888 non-financial firms from 47 countries, we examine the effect of derivative use on firms' risk measures and value. We control for endogeneity by matching users and non-users on the basis of their propensity to hedge. We also use a new technique to estimate the effect of omitted variable bias on our inferences. We find strong evidence that the use of financial derivatives reduces both total risk and systematic risk. The effect of derivative use on firm value is positive but weak, and is more sensitive to endogeneity and omitted variable concerns. This increased sensitivity could account for the mixed evidence in the literature on the effect of hedging on firm value. Keywords The Effects of Derivatives on Firm Risk and Value AbstractUsing a sample of 6,888 non-financial firms from 47 countries, we examine the effect of derivative use on firms' risk measures and value. We control for endogeneity by matching users and non-users on the basis of their propensity to hedge. We also use a new technique to estimate the effect of omitted variable bias on our inferences. We find strong evidence that the use of financial derivatives reduces both total risk and systematic risk. The effect of derivative use on firm value is positive but weak, and is more sensitive to endogeneity and omitted variable concerns. This increased sensitivity could account for the mixed evidence in the literature on the effect of hedging on firm value.

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How Are Derivatives Used? Evidence from the Mutual Fund Industry

Cited by 363 publications

References 33 publications

Speculation and Hedging in Segmented Markets

Speculation and Hedging in Segmented Markets

Hedge Funds for Retail Investors? An Examination of Hedged Mutual Funds

The Effects of Derivatives on Firm Risk and Value

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