Bond mutual funds and complex investments
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We are the first to analyze bond mutual funds’ permission and use of complex investments such as derivatives, restricted securities, and securities lending. Based on unique regulatory information from the SEC’s N-SAR filings, we show that most complex investments do not affect fund performance or risk. However, interest rate futures (IRF) are harmful to bond funds. Bond funds engaging in IRF (46.94% of all bond funds) underperform nonusers by economically meaningful 54 basis point of alpha p.a. Our results reveal that bond funds employ IRF for speculation as they increase funds’ exposure toward interest rate risk.
Keywordsmutual fund performance bond funds performance derivatives interest rate futures
JEL ClassificationG11 G12
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