Risk management in student-managed funds

Abstract

PurposeStudent-managed investment funds typically pursue “plain vanilla” objectives. The purpose of this paper is to demonstrate the value of adding option strategies to reduce the risk of equity positions around earnings announcements. The collar strategy is one such technique with the advantages of a low net cost and limited potential losses.Design/methodology/approachThe authors provide recommendations for utilizing the collar strategy around earnings announcements. The authors also discuss how the value of this strategy is related to the literature on option pricing and earnings announcement returns.FindingsRisk management strategies can enhance the pedagogical value of student-managed investment funds. The authors document how students have successfully utilized the collar strategy to immunize risk.Originality/valueThe collar strategy can enhance the pedagogical value of student-managed investment 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.