An analysis of the use of derivatives by the Canadian mutual fund industry

In this paper we examine the use of derivatives by mutual funds in Canada. First, both the incidence and extent of derivatives usage are low. Second, larger, growth-oriented, domestic equity funds are more likely to use derivatives. We then compare returns and risks between derivative users and non-users with the following findings: (1) There exist no differences between users and non-users for foreign equity funds; (2) For fixed-income funds, users have higher returns and risks than non-users; (3) For domestic equity funds, users have lower returns but higher risks than non-users; however, the differentials disappear if warrants are excluded from the definition of derivatives. © 2004 Elsevier Ltd. All rights reserved.