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

George Aragon, J. Spencer Martin

Research output: Contribution to journalArticlepeer-review

32 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 languageEnglish (US)
Pages (from-to)436-456
Number of pages21
JournalJournal of Financial Economics
Volume105
Issue number2
DOIs
StatePublished - Aug 1 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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