Derivative Use of Turkish Investment Funds During the 2008-09 Financial Crisis

Abstract

This paper centers on the question of how derivatives were utilized by investment fund managers in the course of 2008-09 global financial crisis. In this vein, we analyze investment funds defined as mutual funds and investment trusts, by comparing them in terms of derivative use under three fund categories. With respect to 193 investment funds, our first categorization is “investment objectives” and our results show that the 43.40 % (22.12%) [51.85%] of the funds invested in only equity (bonds) [both equity and bonds] used derivatives. Secondly, in terms of their “legal structures”, we find that 56.67% of the closed-ended and 27.61% of the open-ended funds used derivatives. In the final category, i.e. “fund-type”, it is observed that 51.89% (8.03%) of the A-type (B-type) funds used derivatives. We proceed with logit analysis in order to identify the relation between of fund characteristics and derivative use. We find for each category that the likelihood of derivative use increased as the turnover of funds escalated. Furthermore, we make univariate analyses to compare distributional parameters between derivative users and non-users. In terms of “investment objectives”, users having bond-dominated portfolios had higher standard deviation, idiosyncratic risk and skewness, while those of non-users had higher beta and timing beta. For the structural categorization, users significantly had higher standard deviation, idiosyncratic risk and skewness and yet non-users had a higher beta and timing beta. In case of “fund type”, non-users had a higher beta yet a lower kurtosis. Lastly, we apply regression analyses to test relation between risk change and fund’s previous performance. The empirical results indicate that there was a negative relationship, which was weaker for derivative users.