The Use of Credit Default Swaps by U.S. Fixed-Income Mutual Funds

FDIC Working Paper No. 2011-01

48 Pages Posted: 9 Jan 2012

See all articles by Andre Guettler

Andre Guettler

University of Ulm - Department of Mathematics and Economics; Halle Institute for Economic Research

Tim Adam

Humboldt University

Multiple version iconThere are 2 versions of this paper

Date Written: November 19, 2010

Abstract

We examine the use of credit default swaps (CDS) in the U.S. mutual fund industry. We find that among the largest 100 corporate bond funds the use of CDS has increased from 20% in 2004 to 60% in 2008. Among CDS users, the average size of CDS positions (measured by their notional values) increased from 2% to almost 14% of a fund’s net asset value. Some funds exceed this level by a wide margin. CDS are predominantly used to increase a fund’s exposure to credit risks rather than to hedge credit risk. Consistent with fund tournaments, underperforming funds use multi-name CDS to increase their credit risk exposures. Finally, funds that use CDS underperform funds that do not use CDS. Part of this underperformance is caused by poor market timing.

Keywords: Corporate bond fund, credit default swap, credit risk, fund performance, hedging

JEL Classification: G11, G15, G23

Suggested Citation

Guettler, Andre and Adam, Tim, The Use of Credit Default Swaps by U.S. Fixed-Income Mutual Funds (November 19, 2010). FDIC Working Paper No. 2011-01, Available at SSRN: https://ssrn.com/abstract=1982113 or http://dx.doi.org/10.2139/ssrn.1982113

Andre Guettler (Contact Author)

University of Ulm - Department of Mathematics and Economics ( email )

Helmholzstrasse
Ulm, D-89081
Germany

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Tim Adam

Humboldt University ( email )

Dorotheentr. 1
Berlin, Berlin 10099
Germany
+49 (0)30 2093-5641 (Phone)
+49 (0)30 2093-5643 (Fax)

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