Risk Management in Student-Managed Funds: Earnings Announcements and the Collar Strategy

Abstract

Student-managed investment funds typically pursue “plain vanilla” objectives that satisfy risk-adverse university administrators. We demonstrate the value of adding option strategies to reduce the risk of equity positions around earnings announcements. Such trading strategies enhance the pedagogical value of these classes in several ways. First, students learn how to implement risk reduction strategies. Second, the proper implementation of these strategies requires students to learn the complex mechanisms associated with corporate earnings dissemination and analyst coverage. This also provides an opportunity to study earnings drift, which is a persistent and economically significant financial anomaly. We document how students have successfully utilized collar strategies to immunize risk in the fund at the University of Denver.