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The Use of Derivatives by Investment Managers and Implications for Portfolio Performance and Risk-super-

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  • KINGSLEY FONG
  • DAVID R. GALLAGHER
  • AARON NG

Abstract

This study provides an empirical examination of derivative instruments used by institutional investors. Our analysis provides a unique insight into the role and benefits of derivative securities in active equity portfolio management. We contribute to the literature by using a database that comprises the periodic portfolio holdings and daily trades of institutional fund managers. The consequence of derivative use is analyzed using a number of performance and risk measures. Overall, we find the use of derivatives have a negligible impact on fund returns, and is primarily attributed to low levels of derivative exposure relative to total fund size. We also evaluate how derivatives are used by considering the trading strategies executed by active investment managers. Specifically, option trading patterns are consistent with the execution of momentum trading strategies. This study also documents that active investment managers prefer not to use options markets to engage in informed trading. Copyright (c) International Review of Finance Ltd. 2006.

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Bibliographic Info

Article provided by International Review of Finance Ltd. in its journal International Review of Finance.

Volume (Year): 5 (2005)
Issue (Month): 1-2 ()
Pages: 1-29

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Handle: RePEc:bla:irvfin:v:5:y:2005:i:1-2:p:1-29

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=1369-412X

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  15. Jennifer Koski & Jeffrey Pontiff, 1996. "How Are Derivatives Used? Evidence from the Mutual Fund Industry," Center for Financial Institutions Working Papers 96-27, Wharton School Center for Financial Institutions, University of Pennsylvania.
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Cited by:
  1. Frino, Alex & Lepone, Andrew & Wong, Brad, 2009. "Derivative use, fund flows and investment manager performance," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 925-933, May.

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