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Derivatives do affect mutual fund returns: Evidence from the financial crisis of 1998
Author(s) -
Cao Charles,
Ghysels Eric,
Hatheway Frank
Publication year - 2011
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20489
Subject(s) - closed end fund , open end fund , fund of funds , mutual fund , financial crisis , equity (law) , global assets under management , business , derivative (finance) , finance , financial system , monetary economics , institutional investor , economics , corporate governance , political science , market liquidity , law , macroeconomics
Using a unique data set of detailed balance sheet information on mutual funds, we find that most mutual funds using derivatives do so to a very limited extent that has little discernable impact on returns. However, there exist two types of funds that make more extensive use of derivatives, global funds and specialized domestic equity funds. The risk and return characteristics of these two groups of funds are significantly different from funds employing derivatives sparingly or not at all. Fund managers time their use of derivatives in response to past returns. Evidence during the financial crisis of August 1998 supports the hypothesis that the effects of derivative use are most pronounced during the periods of extreme movement. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:629–658, 2011