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Pitfalls and Perils of Financial Innovation: The Use of CDS by Corporate Bond Funds

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  • Tim Adam
  • Andre Guettler

Abstract

We use the financial crisis of 2007–2009 as a laboratory to examine the costs and benefits of teams versus single managers in asset management. We find that when a fund uses complex trading strategies involving the use of CDS team-managed funds outperform solo-managed funds. This may be due to the greater diversity of expertise, experience and skill of teams relative to single managers. During the financial crisis, however, the performance premium of teams becomes negative, which may be because of the slower decision times of teams, which are especially costly during times of rapidly changing market conditions.

Suggested Citation

  • Tim Adam & Andre Guettler, 2015. "Pitfalls and Perils of Financial Innovation: The Use of CDS by Corporate Bond Funds," SFB 649 Discussion Papers SFB649DP2015-013, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    • Handle: RePEc:hum:wpaper:sfb649dp2015-013
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    6. Mustansar, Talreja, 2023. "Financial innovation, technological improvement and bank’ profitability," OSF Preprints 8wy95, Center for Open Science.
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    More about this item

    Keywords

    Mutual funds; management teams; financial crisis; credit default swaps; performance; market timing;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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