| Derivatives Use of Equity Funds and Risk Characteristics |
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Sung Won Seo, Sun Joong Yoon |
| 주식형 펀드의 파생상품 활용과 펀드위험 및 성과에 대한 연구 |
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서성원, 윤선중 |
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| Abstract |
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This research investigates the effect of derivative trading on the levels of risk and performance in equity funds. Derivatives are traded by 26.22% of equity funds in our sample, which consists of all equity funds in Korea for 12 years between 2002 and 2013. We find that fund age and sales fee are key factors to determine the use of derivatives by equity funds. Our results show that equity funds with a higher sales fee and a higher age are more likely to utilize derivatives. We adopt various risk measures (e.g., the standard deviation of stock returns, market beta, idiosyncratic risk, downside beta, skewness, and kurtosis) to strengthen the robustness of our results. As a result, we find that derivative users present significantly lower levels of risk than non-users after controlling for firms’ characteristics, suggesting that the main purpose of derivatives use is to reduce fund risk. However, derivative users do not exhibit significantly higher performance after controlling for net asset values, sales fees, and other control variables. To quantify fund performance accurately, we construct performance measures including the average excess return, the Sharpe ratio, the alphas calculated by several asset pricing models (e.g., the market model, the Fama-French 3 factor model, the Treynor and Mazuy (1966) model, and the Henriksson and Merton (1981) model). Our findings are consistent with Chen (2011) based on hedge funds in the U.S. and not consistent with Koski and Pontiff (1999) based on mutual funds. We further study the effect of derivative trading on fund risk before and after the 2008 financial crisis and confirm that the use of derivatives has a significant impact on the level of fund risk only after the crisis. Accordingly, our findings imply that professional fund managers start to manage the level of risk using derivatives after experiencing the crisis. |
| Key Words:
Fund Risk,Fund performance,Financial Crisis,Equity Funds,Derivatives Use,펀드 성과,파생상품,주식형 펀드,위험도,금융위기 |
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