How Do Turkish Mutual Funds and Investment Trusts Use Derivative Instruments?

Abstract

This paper centers on the question of how derivative securities are actually used by investment managers. In this vein, we analyze the use of derivatives by mutual funds and investment trusts by comparing three characteristics of funds that use derivatives and that do not. For the years 2008 and 2009, we examine totally 193 funds and our first classification is “investment objectives” and our results show that the 43.40% (22.12%) [51.85%] of the funds invested in only equity (bonds) [balanced as equity and bonds] use derivatives. Secondly, in terms of their “legal structures” and we find that 56.67% of the closed-ended and 27.61% of the open-ended funds use derivatives. As a final classification called as “fund-type”, it is observed that 51.89% (8.03%) of the A-type (B-type) fund investors use derivatives. We proceed with logit analysis to identify the relation between characteristics of funds and derivative usage. We find for all the classification of funds that the likelihood of derivative usage increases as the turnover of funds escalates. Furthermore, we make univariate analyses to compare distributional parameters between users and non-users. In terms of the “investment objectives”, derivative users having bond dominated portfolios have higher standard deviation, idiosyncratic risk and skewness, while those of non-users have higher beta and timing beta. For the structural classification, users significantly have higher standard deviation, idiosyncratic risk and skewness and yet non-users have a higher beta and timing beta. In case of the fund type, non-users have a higher beta yet a lower kurtosis. Lastly, we apply regression analyses to test relation between the change in the risk variables between the first six months of the year, and fund/trust performance during the first six months of the year. The empirical results indicate that the negative relationship between past performance and change in risk is weaker for derivative user funds/trusts.