Information Content of Hedge Fund Equity Option Holdings

42 Pages Posted: 23 Nov 2016 Last revised: 29 Sep 2022

See all articles by Juha Joenväärä

Juha Joenväärä

Aalto University School of Business

Mikko Kauppila

University of Oulu

Pekka Tolonen

University of Oulu

Date Written: April 20, 2018

Abstract

Using a novel sample of 13F reports, we document that hedge funds prefer to purchase equity options whose characteristics are particularly well-suited for informed trading. We show that hedge funds purchase liquid high–embedded leverage options without lottery-like skewness. Consistent with informed trading, we find that especially directional options held by hedge funds deliver superior returns. Although 13F holdings are reported with a 45-day lag, we demonstrate that investors can earn profits by utilizing publicly available information on hedge funds’ option holdings. We confirm that hedge funds’ options add value to their total portfolios, indicating that options are economically significant.

Keywords: Hedge Funds, Informed Trading, Option Return Predictability, Leverage

JEL Classification: G11, G12, G23

Suggested Citation

Joenvaara, Juha and Kauppila, Mikko and Tolonen, Pekka, Information Content of Hedge Fund Equity Option Holdings (April 20, 2018). Available at SSRN: https://ssrn.com/abstract=2873911 or http://dx.doi.org/10.2139/ssrn.2873911

Juha Joenvaara (Contact Author)

Aalto University School of Business ( email )

Finland

Mikko Kauppila

University of Oulu ( email )

P.O. Box 4600
Oulu FIN-90014, 90570
Finland

Pekka Tolonen

University of Oulu ( email )

P.O. Box 4600
Oulu FIN-90014
Finland

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