Information Content of Hedge Fund Equity Option Holdings

53 Pages Posted: 23 Nov 2016 Last revised: 29 Apr 2018

See all articles by Juha Joenväärä

Juha Joenväärä

Aalto University School of Business

Mikko Kauppila

University of Oulu

Pekka Tolonen

University of Oulu

Date Written: April 20, 2018

Abstract

Using a representative sample of 13F reports providing novel information on option characteristics and prices, we document that hedge funds prefer to hold liquid high–embedded leverage options without lottery-like skewness. Various portfolios mimicking hedge funds’ option holdings earn positive risk- and characteristics-adjusted returns, especially for option portfolios mimicking directional trades. Option positions also add value to hedge funds’ total portfolios. Our main conclusions are not specific to the different market volatility states. Similar returns cannot be generated by stock portfolios formed by industry-level view (aggregate embedded leverage), suggesting that funds rationally chose the option market to exploit market incompleteness.

Keywords: Hedge Funds, Informed Trading, Option Return Predictability, Leverage

JEL Classification: G11, G12, G23

Suggested Citation

Joenvaara, Juha and Kauppila, Mikko and Tolonen, Pekka, Information Content of Hedge Fund Equity Option Holdings (April 20, 2018). Available at SSRN: https://ssrn.com/abstract=2873911 or http://dx.doi.org/10.2139/ssrn.2873911

Juha Joenvaara (Contact Author)

Aalto University School of Business ( email )

Finland

Mikko Kauppila

University of Oulu ( email )

P.O. Box 4600
Oulu FIN-90014, 90570
Finland

Pekka Tolonen

University of Oulu ( email )

P.O. Box 4600
Oulu FIN-90014
Finland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
259
Abstract Views
1,646
rank
140,632
PlumX Metrics