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On the use of options by mutual funds: Do they know what they are doing?

Gjergji Cici and Luis-Felipe Palacios

Journal of Banking & Finance, 2015, vol. 50, issue C, 157-168

Abstract: Given recent regulatory inquiries into the derivative-trading practices of mutual funds, we examine their detailed option holdings to assess how mutual funds employ options, what funds use options, and how that affects performance and risk. Mutual funds’ use of options appears consistent with income generation and hedging motives, is systematically related to experience, education, and gender characteristics of portfolio managers, and does not lead to performance benefits, on average. Instead, certain uses of options lead to underperformance. We document no permanent or temporary aggressive risk taking by options users, finding instead that some funds use options to effectively lower risk.

Keywords: Options; Mutual funds; Derivatives; Performance; Hedging; Speculation (search for similar items in EconPapers)
JEL-codes: G11 G20 G23 G29 (search for similar items in EconPapers)
Date: 2015
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