Post by Sapphire Capital on Jul 11, 2008 21:44:38 GMT 4
Derivatives Use and Risk Taking: Evidence from the Hedge Fund Industry
YONG CHEN
Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law
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June 12, 2008
Abstract:
This paper examines the use of derivatives and its relation with risk-taking behavior in the hedge fund industry. With a large sample of hedge funds during 1994-2006, I find that 71% of the funds trade derivatives, making the practice over three times more popular than with mutual funds. Derivatives tend to be used by funds that charge higher incentive fees, impose a less restrictive redemption policy, have management ownership, and employ effective auditing. On average, derivatives users exhibit lower fund risks than nonusers, and risk reduction is especially pronounced for systematic risk among directional-style hedge funds. In some cases, derivatives use is associated with over 30% less risk. However, the risk-adjusted performance is not significantly different between derivatives users and nonusers. Finally, derivatives users engage less in risk shifting.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1146656_code451975.pdf?abstractid=1108735&mirid=3
YONG CHEN
Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law
--------------------------------------------------------------------------------
June 12, 2008
Abstract:
This paper examines the use of derivatives and its relation with risk-taking behavior in the hedge fund industry. With a large sample of hedge funds during 1994-2006, I find that 71% of the funds trade derivatives, making the practice over three times more popular than with mutual funds. Derivatives tend to be used by funds that charge higher incentive fees, impose a less restrictive redemption policy, have management ownership, and employ effective auditing. On average, derivatives users exhibit lower fund risks than nonusers, and risk reduction is especially pronounced for systematic risk among directional-style hedge funds. In some cases, derivatives use is associated with over 30% less risk. However, the risk-adjusted performance is not significantly different between derivatives users and nonusers. Finally, derivatives users engage less in risk shifting.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1146656_code451975.pdf?abstractid=1108735&mirid=3