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A unique view of hedge fund derivatives usage: Safeguard or speculation?

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  • Aragon, George O.
  • Spencer Martin, J.

Abstract

We study the common equity and equity option positions of hedge fund investment advisors over the 1999–2006 period. We find that hedge funds' stock positions predict future returns and that option positions predict both volatility and returns on the underlying stock. A quarterly tracking portfolio of stocks based on publicly observable hedge fund option holdings earns abnormal returns of 1.55% through the end of the quarter. Net of fees, hedge funds using options deliver higher benchmark-adjusted portfolio returns and lower risk than nonusers. The results suggest that hedge fund positions reflect significant timing and selectivity skill.

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  • Aragon, George O. & Spencer Martin, J., 2012. "A unique view of hedge fund derivatives usage: Safeguard or speculation?," Journal of Financial Economics, Elsevier, vol. 105(2), pages 436-456.
    • Handle: RePEc:eee:jfinec:v:105:y:2012:i:2:p:436-456
    DOI: 10.1016/j.jfineco.2012.02.004
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    More about this item

    Keywords

    Hedge funds; Options; Derivatives; Market efficiency;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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