Unmasking Mutual Fund Derivative Use

84 Pages Posted: 15 Sep 2020 Last revised: 4 Oct 2022

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: October 3, 2022

Abstract

Using new SEC data, we study how funds use derivatives and how derivatives contribute to performance. Despite small portfolio weights, derivatives significantly impact funds' leverage and contribute largely to returns. Contrary to prior research concluding derivatives are used for hedging, we find most derivative users buy index derivatives to amplify market exposure. Surprisingly, they underperform nonusers yet receive more flows. Using COVID-19 pandemic as a shock to evaluate explanations, we find they suffered a double whammy: failed to outperform nonusers by suffering losses from long derivative positions during the crash and from newly opened short positions when markets unexpectedly rebounded.

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 (October 3, 2022). 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 )

London
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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