Equity Funds and Derivatives: Evidence from Linked Fund-Trade Data

Abstract

Building on data collected under the EMIR framework, we provide new insight into the type of derivatives that are traded by UCITS equity funds, why some of them trade derivatives whilst others do not, what makes some more active traders and to what extend the trading in derivatives is a reaction to daily changes in the market. 46% of UCITS equity funds are trading derivatives. Three types of contracts account for 78% of funds’ derivatives trades: currency forwards, equity futures, and equity options. We find that the derivatives trading behavior is related to the fund-family affiliation and the investment strategy. Over time, cash inflows as well as currency risk seem to have a significant influence, which suggests that derivatives are used for transaction costs or risk reduction purposes.

Keywords: UCITS funds, derivatives trading, fund families, flows, risks

JEL Classification: G10, G20, G23