Bond Mutual Funds and Complex Investments
Journal of Asset Management 2017, 18(6), 433-456
43 Pages Posted: 15 Mar 2016 Last revised: 18 Mar 2018
Date Written: March 14, 2018
We are the first to analyze bond mutual funds’ permission and use of complex investment practices like derivatives, restricted securities and securities lending. Based on unique regulatory information from the SEC’s N-SAR filings, we show that most complex investments do not affect fund performance or risk. However, interest rate futures (IRF) are harmful to bond funds. Bond funds engaging in IRF (45.8% of all bond funds) underperform nonusers by economically meaningful 51 basis point p.a. (alpha). Further results reveal that bond funds employ IRF for speculation as they increase funds’ exposure towards interest rate risk.
Keywords: Mutual fund performance, bond funds performance, derivatives interest rate futures
JEL Classification: G11, G12
Suggested Citation: Suggested Citation