Derivatives Use and Risk Taking: Evidence from the Hedge Fund Industry

2011/04/19 by Yong Chen · 2 citations
Economics, Econometrics and Finance · Business, Management and Accounting · #Financial Markets and Investment Strategies #Corporate Finance and Governance #Risk Management in Financial Firms

paper · doi:10.1017/s0022109011000238

Abstract

Abstract This paper examines the use of derivatives and its relation with risk taking in the hedge fund industry. In a large sample of hedge funds, 71% of the funds trade derivatives. After controlling for fund strategies and characteristics, derivatives users on average exhibit lower fund risks (e.g., market risk, downside risk, and event risk), such risk reduction is especially pronounced for directional-style funds. Further, derivatives users engage less in risk shifting and are less likely to liquidate in a poor market state. However, the flow-performance relation suggests that investors do not differentiate derivatives users when making investing decisions.

Citations

• Risk Taking by Mutual Funds as a Response to Incentives
• A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity
• Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry
• Costly Search and Mutual Fund Flows
• Mutual Fund Performance

Cited by

• Optimal Option Portfolio Strategies: Deepening the Puzzle of Index Option Mispricing
• The time-varying effects of geopolitical risk on mutual fund risk taking. [europepmc]

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