Unmasking Mutual Fund Derivative Use

71 Pages Posted: 15 Sep 2020 Last revised: 29 Mar 2021

See all articles by Ron Kaniel

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Pingle Wang

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance

Date Written: September 14, 2020


Utilizing new SEC data enabling us to compute performance of mutual funds' derivative positions, we study how funds use derivatives and how derivatives contribution to performance. In contrast to prior research concluding derivatives are used for hedging, we find most active equity funds use derivatives to amplify market exposure by buying index derivatives, underperform, yet receive more flows. Hedging funds, the minority, in contrast utilize single stock derivatives. Despite small portfolio weights, derivatives significantly impact funds' leverage and contribute largely to returns and cross-sectional differences in returns. Swaps, ignored by prior studies, are especially important in explaining cross-sectional differences in derivative contributions. In response to the COVID-19 pandemic outbreak, funds trade more heavily on short derivative positions, a pattern driven by managers for which the risk of recession is likely more salient. Amplifying funds suffer a double whammy. While they shift strategies, they are slow to react and experience similarly large losses to nonusers in the outbreak. By the time they shift, the market has already started to rebound, and they lose on their short positions.

Keywords: COVID-19, Derivatives, Mutual Funds

JEL Classification: G01, G11, G12, G14, G23

Suggested Citation

Kaniel, Ron and Wang, Pingle, Unmasking Mutual Fund Derivative Use (September 14, 2020). Available at SSRN: https://ssrn.com/abstract=3692838 or http://dx.doi.org/10.2139/ssrn.3692838

Ron Kaniel

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

United Kingdom

Pingle Wang (Contact Author)

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance ( email )

800 West Campbell
Richarson, TX 75080
United States

HOME PAGE: http://www.wangpingle.com

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