Bond mutual funds and complex investments

Abstract

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.

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Corresponding author

Correspondence to Martin Rohleder.

Additional information

This paper represents the authors’ personal opinion and does not necessarily reflect the views of Tecta Invest GmbH. We are grateful for helpful comments and suggestions by Jon Fulkerson, Amit Goyal, Andreas Rathgeber, Hendrik Scholz, Martin Wallmeier, Andreas Walter, and participants at the 2015 International doctoral seminar at University of Giessen and participants at the 2016 Annual International Conference of the German Operations Research Society. We acknowledge financial support by the Research Center Global Business Management of the University of Augsburg. All remaining errors are our own.

Appendix: Merging of N-SAR and CRSP

Appendix: Merging of N-SAR and CRSP

Table 11 displays averages of fund characteristics for both the merged N-SAR/CRSP sample (Panel a) and the complete actively managed domestic bond fund universe from CRSP (Panel b). Funds in the merged sample have higher TNA and are somewhat older. Evans et al (2016) and Rohleder et al (2017) find similar results for their matched samples of equity funds. Overall, there are no substantial differences between both datasets. Consequently, the sample is representative for the universe of all actively managed US domestic bond funds.

Table 11 Comparison of the merged N-SAR/CRSP and the complete CRSP active domestic bond fund samples

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Cite this article

Natter, M., Rohleder, M., Schulte, D. et al. Bond mutual funds and complex investments. J Asset Manag 18, 433–456 (2017). https://doi.org/10.1057/s41260-017-0046-7

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Keywords

  • mutual fund performance
  • bond funds
  • performance
  • derivatives
  • interest rate futures

JEL Classification

  • G11
  • G12