The Benefits of Option Use by Mutual Funds

57 Pages Posted: 24 Sep 2014 Last revised: 28 Mar 2019

See all articles by Markus Natter

Markus Natter

University of Augsburg

Martin Rohleder

University of Augsburg

Dominik Schulte

University of Augsburg

Marco Wilkens

University of Augsburg

Date Written: January 24, 2016

Abstract

Based on comprehensive regulatory data on equity mutual fund option use from the SEC’s N-SAR filings, we are the first to present consistent evidence that equity funds’ option use generates higher risk-adjusted performance. We further show that this is a direct effect of option use and not an indirect effect of other fund characteristics. Option use also directly results in lower systematic risk, as funds show significantly lower market betas during periods of options usage. Finally, mutual funds use options mainly for hedging as they primarily use protective puts and covered calls. These results are independent of known phenomena, such as the low beta anomaly, and robust to tests for endogeneity and a novel 5-factor model including an investable option strategy factor (IOS). Overall, our findings show that mutual fund option use is beneficial to investors and does not pose risk to the financial system as feared by the SEC. Our results are thus important for investors as well as regulators.

Keywords: Mutual funds, performance, options, hedging

JEL Classification: G11, G20, G23

Suggested Citation

Natter, Markus and Rohleder, Martin and Schulte, Dominik and Wilkens, Marco, The Benefits of Option Use by Mutual Funds (January 24, 2016). Journal of Financial Intermediation 2016, 26, 142-168. Available at SSRN: https://ssrn.com/abstract=2499524 or http://dx.doi.org/10.2139/ssrn.2499524

Markus Natter

University of Augsburg ( email )

Universitaetsstrasse 16
Augsburg, 86159
Germany
+49 821 598 4497 (Phone)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/mitarbeiter/natter_markus/

Martin Rohleder

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4120 (Phone)

Dominik Schulte

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

Marco Wilkens (Contact Author)

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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