Practical Applications of Information Content of Hedge Fund Equity Option Holdings

In Information Content of Hedge Fund Equity Option Holdings, from the Spring 2023 issue of The Journal of Alternative Investments, Juha Joenväärä of Aalto University, Mikko Kauppila of the University of Oulu, and Pekka Tolonen of OP Financial Group show that hedge funds are skilled at selecting options and prefer options that have characteristics that are favorable to investors with an informational advantage. Interestingly, even though the positions are reported with a considerable lag, mimicking them with a copycat strategy is still a profitable endeavor. The authors built a novel dataset of hedge funds’ long option positions from publicly available government 13F filings that normally do not contain information on the market value of option positions. They then matched the options held with a commercial database to find details about them and discover what kind of options hedge funds prefer and how the positions perform.