EFA 2008 Athens Meetings Paper
49 Pages Posted: 25 Mar 2008 Last revised: 8 Feb 2010
Date Written: January 31, 2010
This paper examines the use of derivatives and its relation with risk-taking in the hedge fund industry. From a large sample of hedge funds, 71% of the funds trade derivatives. After controlling for fund strategies and characteristics, derivatives users on average exhibit lower fund risks, such as market risk, downside risk, and event risk; such risk reduction is especially pronounced for directional-style funds. Further, derivatives users engage less in risk shifting and are less likely to liquidate in a poor market state. However, the flow-performance relation suggests that investors do not differentiate derivatives users when making investing decisions.
Keywords: Hedge funds, Derivatives use, Risk taking, Risk shifting, Liquidation risk, Flow-performance relation
JEL Classification: G11, G23, G34
Suggested Citation: Suggested Citation
Chen, Yong, Derivatives Use and Risk Taking: Evidence from the Hedge Fund Industry (January 31, 2010). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming; EFA 2008 Athens Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1108735