Evidence on Options Use by U.S. Mutual Funds

Summary

This article summarizes a study of U.S. mutual funds that links SEC N-SAR options disclosures with fund returns and characteristics. The sample covers 1998 through November 2013 and includes 106,357 filings. Cross-sectional and panel analyses compare funds that use options with those that do not, and examine long and short positions to distinguish possible effects of hedging from speculation.

The reported findings associate options use with higher risk-adjusted performance and lower market beta. The analysis attributes performance gains mainly to short option positions and risk reduction mainly to long positions, interpreting the overall pattern as consistent with hedging. The reported results persist across controls for leverage, market timing, market conditions, and alternative performance models. These are observational findings, however; the summary does not provide effect sizes or full model details, and it cannot establish that the results generalize beyond the sampled funds and period. The article argues that options use did not increase systemic risk in this setting.

Key ideas

• The study combines SEC options disclosures with mutual fund returns and characteristics for a historical U.S. sample.
• Funds using options are reported to have higher risk-adjusted performance and lower market beta.
• The summary links performance gains primarily to short option positions and risk reduction to long positions.
• Results are reported as robust to several alternative controls and performance models.
• The evidence is observational and does not establish that the findings apply to other periods or fund populations.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.