A unique view of hedge fund derivatives usage: Safeguard or speculation?

George Aragon; J. Spencer Martin

doi:10.1016/j.jfineco.2012.02.004

A unique view of hedge fund derivatives usage: Safeguard or speculation?

George Aragon, J. Spencer Martin

Finance

Research output: Contribution to journal › Article › peer-review

50 Scopus citations

Abstract

We study the common equity and equity option positions of hedge fund investment advisors over the 1999-2006 period. We find that hedge funds' stock positions predict future returns and that option positions predict both volatility and returns on the underlying stock. A quarterly tracking portfolio of stocks based on publicly observable hedge fund option holdings earns abnormal returns of 1.55% through the end of the quarter. Net of fees, hedge funds using options deliver higher benchmark-adjusted portfolio returns and lower risk than nonusers. The results suggest that hedge fund positions reflect significant timing and selectivity skill.

Original language	English (US)
Pages (from-to)	436-456
Number of pages	21
Journal	Journal of Financial Economics
Volume	105
Issue number	2
DOIs	https://doi.org/10.1016/j.jfineco.2012.02.004
State	Published - Aug 2012

Keywords

Derivatives
G11
G12
Hedge funds
Market efficiency
Options

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics
Strategy and Management

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10.1016/j.jfineco.2012.02.004

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@article{64aecaadb53c41eb8e7440bcb9f32c92,

title = "A unique view of hedge fund derivatives usage: Safeguard or speculation?",

abstract = "We study the common equity and equity option positions of hedge fund investment advisors over the 1999-2006 period. We find that hedge funds' stock positions predict future returns and that option positions predict both volatility and returns on the underlying stock. A quarterly tracking portfolio of stocks based on publicly observable hedge fund option holdings earns abnormal returns of 1.55% through the end of the quarter. Net of fees, hedge funds using options deliver higher benchmark-adjusted portfolio returns and lower risk than nonusers. The results suggest that hedge fund positions reflect significant timing and selectivity skill.",

keywords = "Derivatives, G11, G12, Hedge funds, Market efficiency, Options",

author = "George Aragon and {Spencer Martin}, J.",

note = "Funding Information: We thank Philippe Jorion (the referee) for comments that have greatly improved this paper. We also thank Nick Bollen, Wayne Ferson, Chris Jones, Marcin Kacperczyk, Robert Kosowski, Alan Marcus, Stewart Mayhew, Stefan Nagel, Jeff Pontiff, Cristian Tiu, Josh White, and seminar participants at Boston College, University of Virginia (McIntire), US Securities and Exchange Commission, Drexel University, University of Melbourne, the Australian National University, National University of Singapore, Claremont McKenna College, Arizona Finance Retreat, and the meetings of the Financial Research Association, Western Finance Association, and European Finance Association. George O. Aragon acknowledges financial support from the Foundation for Managed Derivatives Research. ",

year = "2012",

month = aug,

doi = "10.1016/j.jfineco.2012.02.004",

language = "English (US)",

volume = "105",

pages = "436--456",

journal = "Journal of Financial Economics",

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AU - Aragon, George

AU - Spencer Martin, J.

N1 - Funding Information: We thank Philippe Jorion (the referee) for comments that have greatly improved this paper. We also thank Nick Bollen, Wayne Ferson, Chris Jones, Marcin Kacperczyk, Robert Kosowski, Alan Marcus, Stewart Mayhew, Stefan Nagel, Jeff Pontiff, Cristian Tiu, Josh White, and seminar participants at Boston College, University of Virginia (McIntire), US Securities and Exchange Commission, Drexel University, University of Melbourne, the Australian National University, National University of Singapore, Claremont McKenna College, Arizona Finance Retreat, and the meetings of the Financial Research Association, Western Finance Association, and European Finance Association. George O. Aragon acknowledges financial support from the Foundation for Managed Derivatives Research.

PY - 2012/8

Y1 - 2012/8

N2 - We study the common equity and equity option positions of hedge fund investment advisors over the 1999-2006 period. We find that hedge funds' stock positions predict future returns and that option positions predict both volatility and returns on the underlying stock. A quarterly tracking portfolio of stocks based on publicly observable hedge fund option holdings earns abnormal returns of 1.55% through the end of the quarter. Net of fees, hedge funds using options deliver higher benchmark-adjusted portfolio returns and lower risk than nonusers. The results suggest that hedge fund positions reflect significant timing and selectivity skill.

AB - We study the common equity and equity option positions of hedge fund investment advisors over the 1999-2006 period. We find that hedge funds' stock positions predict future returns and that option positions predict both volatility and returns on the underlying stock. A quarterly tracking portfolio of stocks based on publicly observable hedge fund option holdings earns abnormal returns of 1.55% through the end of the quarter. Net of fees, hedge funds using options deliver higher benchmark-adjusted portfolio returns and lower risk than nonusers. The results suggest that hedge fund positions reflect significant timing and selectivity skill.

KW - Derivatives

KW - G11

KW - G12

KW - Hedge funds

KW - Market efficiency

KW - Options

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JO - Journal of Financial Economics

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ER -

A unique view of hedge fund derivatives usage: Safeguard or speculation?

Abstract

Keywords

ASJC Scopus subject areas

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