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Unmasking Mutual Fund Derivative Use

Author

Listed:
  • Ron Kaniel
  • Pingle Wang

Abstract

Using new SEC data, we study fund derivative use and its impact on performance. Despite small portfolio weights, derivatives contribute largely to fund returns. Contrary to prior research, we find most employ derivatives to amplify, not hedge, equity returns. Using machine learning to classify funds’ derivative strategies reveals high specializations linked to information-related trading, liquidity management, gaining exposure, or hedging motives. Long index derivative users drive the amplification. During COVID-19, these users significantly increased derivative use more than others and shifted strategies, but initially lost on existing positions and then on newly opened short positions when markets unexpectedly rebounded.

Suggested Citation

  • Ron Kaniel & Pingle Wang, 2025. "Unmasking Mutual Fund Derivative Use," The Review of Financial Studies, Society for Financial Studies, vol. 38(4), pages 1120-1166.
    • Handle: RePEc:oup:rfinst:v:38:y:2025:i:4:p:1120-1166.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaf001
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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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