The benefits of option use by mutual funds

Natter, Markus; Rohleder, Martin; Schulte, Dominik; Wilkens, Marco

doi:10.1016/j.jfi.2016.01.002

Cited by 40 publications

(23 citation statements)

References 57 publications

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“…Although Cici and Palacios (2015) do not find any effect of options on mutual fund portfolios, Natter et al (2016) find superior performance among U.S. domestic equity mutual funds investing in options. The outperformance is mainly driven by short option positions taken by mutual fund managers (e.g., found with covered call writing).…”

Section: Analysis Of Investable Productsmentioning

confidence: 64%

“…This is not coercively conflicting with the findings of Natter et al (2016), as the outperformance of actively managed funds engaging in options the authors measure is compared to their non-using peers. This is not coercively conflicting with the findings of Natter et al (2016), as the outperformance of actively managed funds engaging in options the authors measure is compared to their non-using peers.…”

Section: Analysis Of Investable Productsmentioning

confidence: 67%

“…All in all, I conclude from this analysis that potential benefits of option-writing indices-as far as there are any-are consumed by the costs investment providers charge and have to pay for the replication, respectively. This is not coercively conflicting with the findings of Natter et al (2016), as the outperformance of actively managed funds engaging in options the authors measure is compared to their non-using peers.…”

Section: Natter | 285mentioning

confidence: 67%

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Options‐based benchmark indices—A review of performance and (in)appropriate measures

Natter

2017

Journal of Futures Markets

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This paper reviews the performance and profitability of different option strategy benchmark indices provided by the CBOE. Using different performance approaches, I show that performance measurement of these indices is highly complex and sensitive to the model choice. Moreover, this study controls for time‐varying delta exposure via linear timing approaches and uses a linear option‐factor model that is independent from the portfolio composition. Splitting the sample, I find that outperformance reported by previous studies is mostly driven by limited data. Moreover, the profitability of option strategies for private investors is evaluated based on easily investable investment products.

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Section: Analysis Of Investable Productsmentioning

confidence: 64%

Section: Analysis Of Investable Productsmentioning

confidence: 67%

Section: Natter | 285mentioning

confidence: 67%

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Options‐based benchmark indices—A review of performance and (in)appropriate measures

Natter

2017

Journal of Futures Markets

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“…As an alternative to fund fixed effects, we also try the approach used by Natter et al (). In addition to our Borrowing indicator variable, we use a second indicator variable, Not Borrowing , indicating a fund that uses borrowing but not within the particular period .…”

Section: Performancementioning

confidence: 99%

“…See e.g., Elton et al () (stating that open‐end funds “cannot use leverage”); Natter et al () (“Mutual funds are generally prohibited from using any type of leverage.”).…”

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confidence: 99%

Mutual Funds that Borrow

Warburton¹,

Simkovic²

2019

J Empirical Legal Studies

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Securities laws prohibit open-end mutual funds from borrowing more than one-third of their capital structure because of concerns that too much borrowing may harm investors. This is the first article to examine the performance of open-end funds that borrow money within these permissible limits. We construct a database from annual filings of open-end domestic equity mutual funds covering 17 years from 2000 to 2016. Eighteen percent of funds borrowed money for leverage within that time. We find that borrowing funds underperform their nonborrowing peers by 62 basis points per year on a total return basis, while also incurring greater risk. After accommodating for the greater risk taking, we find that borrowers underperform by 48 to 72 basis points annually. By contrast, funds that use derivatives and other financial instruments perform about as well as unlevered mutual funds, before and after adjusting for risk, and with less volatility. This suggests that many mutual funds use derivatives to hedge risk rather than as a substitute for leverage through the capital structure. Thus borrowing may present a greater risk than derivatives, which have received more attention than borrowing. Fund investors and regulators would benefit from greater transparency into mutual fund capital structure.Mutual Funds that Borrow 769

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Investment horizon and option market activity

Kim

2022

Journal of Futures Markets

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This paper uses a unique data set of institutional investors' equity and equity option holdings to investigate how their investment horizons are associated with option trading and its information content. Firms with more short-term investors have more active option markets relative to stock markets. Also, they have a greater proportion of option trading volume ascribed to high-leveraged contracts. Furthermore, both abnormal option trading before earnings announcements and informativeness of option market statistics are more pronounced when short-term investors predominate. These findings suggest that short-term institutions trade leveraged contracts actively to exploit information, thus effecting price discovery in option markets.

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The benefits of option use by mutual funds

Cited by 40 publications

References 57 publications

Options‐based benchmark indices—A review of performance and (in)appropriate measures

Options‐based benchmark indices—A review of performance and (in)appropriate measures

Mutual Funds that Borrow

Investment horizon and option market activity

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