Premium
How Are Derivatives Used? Evidence from the Mutual Fund Industry
Author(s) -
Koski Jennifer Lynch,
Pontiff Jeffrey
Publication year - 1999
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00126
Subject(s) - business , equity (law) , cash flow , mutual fund , derivative (finance) , actuarial science , systematic risk , open end fund , fund of funds , investment management , finance , institutional investor , corporate governance , political science , market liquidity , law
We investigate investment managers' use of derivatives by comparing return distributions for equity mutual funds that use and do not use derivatives. In contrast to public perception, derivative users have risk exposure and return performance that are similar to nonusers. We also analyze changes in fund risk in response to prior fund performance. Changes in risk are substantially less severe for funds using derivatives, consistent with the explanation that managers use derivatives to reduce the impact of performance on risk. We provide new evidence regarding the implications of cash flows and managerial gaming for the relation between performance and risk.