Derivatives, Short Selling and US Equity and Bond Mutual Funds

Kaveh Moradi Dezfouli () and Lawrence Kryzanowski ()
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Kaveh Moradi Dezfouli: John Molson School of Business, Concordia University, Montreal, Quebec, Canada H3G 1M8
Lawrence Kryzanowski: John Molson School of Business, Concordia University, Montreal, Quebec, Canada H3G 1M8

Quarterly Journal of Finance (QJF), 2016, vol. 06, issue 01, 1-44

Abstract: The use and effect of derivatives and short selling by US equity and bond open-end mutual funds are studied using a large and unique database. We find that the likelihood of their use is positively related to fund size, family size, and fund turnover for both fund types except for short selling by equity funds from larger families. Our findings suggest that funds that use derivatives exhibit significantly higher benchmark-adjusted performances based on both gross- and net-of-fees returns. This is done without adversely affecting market betas, net expense ratios (NERs), or brokerage fees as a proportion of total net assets (TNA). We find that for bond funds derivative use is negatively associated with non-systematic risk and short selling use is positively associated with total and systematic risk.

Keywords: Derivatives; short selling; mutual funds; risk; performance; expense ratio (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1142/S2010139216400024

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