Date of Award
Bachelor of Arts
Brian Tang, Ph.D.
I provide new empirical evidence on the effect of derivatives usage on the risk and performance of a group of mutual funds mimicking hedge fund strategies, namely alternative mutual funds (AMFs). Using data on a sample of 914 AMFs from Morningstar during 2002-2017, I show that while the use of derivatives does impact the performance of AMFs, it significantly increases AMFs’ total and idiosyncratic volatilities, even after we control for various fund characteristics. This positive relation between the use of derivatives and the risk-taking of AMFs is particularly strong during the crisis period, and Bear Market, Long-Short Credit, Managed Futures, and Multialternative funds. Overall, the result is in contrast to the documented negative or insignificant relation between derivatives usage and performance for hedge funds or traditional mutual funds, suggesting that AMFs as a group tend to use derivatives for speculative purposes
McAlpine, Alyse, "Derivatives Use and Risk Taking: Evidence from Alternative Mutual Funds" (2020). Financial Analyst. 16.