This paper is the first to identify and classify nearly all investment instruments held by equity funds by investigating their portfolio holdings. This enables us to analyze the effects of long and short exposures from different complex instruments including short sales, options and futures but also previously neglected derivatives like warrants and units on funds’ risk, performance and other characteristics. These analyses are of general interest, especially in the light of ongoing discussions regarding further regulation of complex instrument use by mutual funds. Our empirical analyses document that on average more than 40% of funds use complex instruments. However, relative to their total assets, funds’ average exposure from such positions is very small with values below 2%. Consequentially, the effects of instruments are often weaker than suggested by previous research or even show opposite directions.
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