From: Dr. Martin Rohleder
Sent: March 9, 2016
Subject: Comment regarding file number S7-24-15

To the U.S. Securities and Exchange Commission,
Dear Sir or Madam,

in context of a proposed rule regarding the derivatives use of mutual funds (file number S7-24-15) we recently had the attached paper titled "The Benefits of Option Use by Mutual Funds" published in the Journal of Financial Intermediation which might be of interest for the commission.

In the paper, we use information on mutual fund option use from the electronic N-SAR filings of more than 2,500 actively managed US domestic equity mutual funds over the period from 1998 to 2013, matched with further fund specific data from the CRSP survivorship bias free mutual fund database.

Our findings indicate that:
1) 24% of the mutual funds in our dataset use options of some kind at some point during our sample period. Such user funds use options in ca. 40% of the time on average, so that options are used by all mutual funds in ca. 10% of the time.
2) Cross-sectional analyses of option use show that user funds have significantly higher risk-adjusted returns (44 basis points p.a.) on average compared to non-user funds controling for a wide range of fund specific control variables. Further, user funds have also significantly lower market betas (up to 5.1 percentage points) compared to non-user funds on average.
3) Panel analyses of option use versus non-use reveal that these effects are direct effects of option use rather than indirect effects driven by other cross-sectional differences between users and non-users. Specifically, option use results in up to 91 basis points p.a. higher alpha and 8.3 percentage points lower market beta compared to non-use.
4) Distinguishing between net long and net short option positions using the corresponding balance sheet data from the N-SAR filings, we show that the performance-enhancement effect is primarily driven by short positions which we relate to the use of covered calls. Further, the risk-reduction is primarily driven by the long option positions, which we relate to the use of protective puts.
5) These results are robust to a wide range of different empirical designs and various performance measures explicitly controling for the non-linearities implied by the use of options.

Overall, we conclude that the use of options is beneficial to investors as mutual funds use options for defensive rather than speculative purposes resulting in higher risk-adjusted performance and lower market risk.

If you have any questions or need further information on the analyses conducted in our paper, please do not hesitate to ask.

Best regards,
Martin Rohleder, Markus Natter, Dominik Schulte, Marco Wilkens

Dr. Martin Rohleder
Finance and Banking
University of Augsburg

Copyrighted material redacted. Authors cite:
M. Natter et al., The benefits of option use by mutual funds, J. Finan. Intermediation (2016),