Complex Instruments Have Increased Risk and Reduced Performance at Mutual Funds

This paper is the first to identify and classify nearly all investment instruments held by equity funds by investigating their portfolio holdings. This enables us to analyze the effects of long and short exposures from different complex instruments including short sales, options and futures but also previously neglected derivatives like warrants and units on funds’ risk, performance and other characteristics. These analyses are of general interest, especially in the light of ongoing discussions regarding further regulation of complex instrument use by mutual funds. Our empirical analyses document that on average more than 40% of funds use complex instruments. However, relative to their total assets, funds’ average exposure from such positions is very small with values below 2%. Consequentially, the effects of instruments are often weaker than suggested by previous research or even show opposite directions.

This paper is the first to identify and classify virtually all investment instruments held by equity funds from their portfolio holdings. This enables us to analyze the effects of long and short exposures from different complex instruments including short sales, options and futures but also previously neglected derivatives like warrants and units on funds’ risk, performance and characteristics. These analyses are of general interest, especially in the light of ongoing discussions regarding further regulation of complex instrument use by mutual funds. Our empirical analyses document that more than 40% of funds use complex instruments. However, relative to their total assets, funds’ average exposure from such positions is very small with values below 1%. Consequentially, the effects of instruments are often weaker than suggested by previous research or even show opposite directions.

This study examines the influence of client deposits, securities, and outstanding shares on key banking operations and their role in the development of mutual funds within Kazakhstan's financial system. The research focuses on identifying which financial instruments contribute significantly to resource allocation and the sustainability of mutual funds. Two primary hypotheses were tested: first, that securities and deposits of legal entities significantly impact banking performance and mutual fund growth, and second, that individual deposits and outstanding securities have a measurable influence on these outcomes. To address these questions, a multivariate analysis of covariance (MANCOVA) was conducted, supported by univariate tests and graphical methods such as Q-Q plots and raincloud plots. Data from Kazakhstan’s financial institutions between 2012 and 2023 were analyzed to assess the statistical significance of these factors. Deposits from legal entities demonstrated their dominant role in the financial system, significantly impacting bank liquidity and resource allocation. In contrast, individual deposits and outstanding securities showed no statistical significance, reflecting the low engagement of private investors and their preference for traditional deposits over more complex investment instruments. Securities showed a significant impact on banking operations but were focused on the corporate sector and institutional investments. The results contrast with international markets in a strong dependence of the financial system on the corporate sector. Although securities are widely used to attract capital and manage investments, their market in Kazakhstan likely remains narrowly specialized and insufficiently liquid, a contrast rarely seen in studies of more developed markets.