On derivatives use by equity-specialized hedge funds

Abstract

This study examines the performance and risk characteristics associated with derivatives use by equity-specialized hedge funds. For equity options, the results provide little evidence for profitability of the usage, but they are found to be associated with lower risk. Equity options are likely to be used for option writing strategies given their negative association with the skewness of hedge fund returns. For equity index futures, the results show evidence that the use of equity index futures is associated with lower performance as being substitute to share restrictions.