Unmasking Mutual Fund Derivative Use

Ron Kaniel and Pingle Wang

The Review of Financial Studies, 2025, vol. 38, issue 4, 1120-1166

Abstract: Using new SEC data, we study fund derivative use and its impact on performance. Despite small portfolio weights, derivatives contribute largely to fund returns. Contrary to prior research, we find most employ derivatives to amplify, not hedge, equity returns. Using machine learning to classify funds’ derivative strategies reveals high specializations linked to information-related trading, liquidity management, gaining exposure, or hedging motives. Long index derivative users drive the amplification. During COVID-19, these users significantly increased derivative use more than others and shifted strategies, but initially lost on existing positions and then on newly opened short positions when markets unexpectedly rebounded.

JEL-codes: G01 G11 G12 G14 G23 (search for similar items in EconPapers)
Date: 2025
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Working Paper: Unmasking Mutual Fund Derivative Use (2022)
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