On the Use of Options by Mutual Funds: Do They Know What They are Doing?

42 Pages Posted: 15 Mar 2011 Last revised: 10 Jan 2014

See all articles by Gjergji Cici

Gjergji Cici

University of Kansas - School of Business

Luis-Felipe Palacios

University of Pennsylvania, WRDS

Multiple version iconThere are 2 versions of this paper

Date Written: January 10, 2014

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

Suggested Citation

Cici, Gjergji and Palacios, Luis-Felipe, On the Use of Options by Mutual Funds: Do They Know What They are Doing? (January 10, 2014). Available at SSRN: https://ssrn.com/abstract=1786125 or http://dx.doi.org/10.2139/ssrn.1786125

Gjergji Cici (Contact Author)

University of Kansas - School of Business ( email )

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HOME PAGE: http://business.ku.edu/gjergji-cici

Luis-Felipe Palacios

University of Pennsylvania, WRDS ( email )

Philadelphia, PA 19104
United States

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