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On the use of options by mutual funds: Do they know what they are doing?

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  • Cici, Gjergji
  • Palacios, Luis-Felipe

Abstract

Using detailed options holdings, we examine how mutual funds' use of options affects performance and risk. Using options generates, on average, no performance advantages. In fact, funds that follow certain distinct strategies underperformed. The only salutary impact is lower portfolio risk for a subset of funds that buy puts for insurance. Perhaps wanting to limit additional losses, these funds also respond to poor performance in the first part of the year by reducing portfolio risk. Our findings suggest no permanent or temporary aggressive risk taking by options users, suggesting instead that some funds use options primarily for risk management.

Suggested Citation

  • Cici, Gjergji & Palacios, Luis-Felipe, 2013. "On the use of options by mutual funds: Do they know what they are doing?," CFR Working Papers 11-08 [rev.], University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:1108r
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    References listed on IDEAS

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    Cited by:

    1. Adam, Tim & Güttler, André, 2015. "Pitfalls and perils of financial innovation: The use of CDS by corporate bond funds," SFB 649 Discussion Papers 2015-013, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    2. repec:hum:wpaper:sfb649dp2015-017 is not listed on IDEAS
    3. Gałkiewicz, Dominika Paula, 2015. "Loss potential and disclosures related to credit derivatives: A cross-country comparison of corporate bond funds under U.S. and German regulation," SFB 649 Discussion Papers 2015-017, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    4. Adam, Tim & Guettler, Andre, 2015. "Pitfalls and perils of financial innovation: The use of CDS by corporate bond funds," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 204-214.
    5. repec:hum:wpaper:sfb649dp2015-013 is not listed on IDEAS

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