Information Content of Hedge Fund Equity Option Holdings
The Journal of Alternative Investments, Spring 2023, 25(4), 119-147, DOI: 10.3905/jai.2023.1.183
Posted: 23 Nov 2016 Last revised: 29 Sep 2022
Date Written: April 20, 2018
Abstract
Using a novel sample of 13F reports, we document that hedge funds prefer to purchase equity options whose characteristics are particularly well-suited for informed trading. We show that hedge funds purchase liquid high–embedded leverage options without lottery-like skewness. Consistent with informed trading, we find that especially directional options held by hedge funds deliver superior returns. Although 13F holdings are reported with a 45-day lag, we demonstrate that investors can earn profits by utilizing publicly available information on hedge funds’ option holdings. We confirm that hedge funds’ options add value to their total portfolios, indicating that options are economically significant.
Keywords: Hedge Funds, Informed Trading, Option Return Predictability, Leverage
JEL Classification: G11, G12, G23
Suggested Citation: Suggested Citation