Pitfalls and perils of financial innovation: The use of CDS by corporate bond funds

We use the financial crisis of 2007–2009 as a laboratory to examine the costs and benefits of teams versus single managers in asset management. We find that when a fund uses complex trading strategies involving the use of CDS team-managed funds outperform solo-managed funds. This may be due to the g...

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Bibliographic Details
Published in:Journal of banking & finance 2015-06, Vol.55, p.204-214
Main Authors: Adam, Tim, Guettler, Andre
Format: Article
Language:English
Subjects:
Asset management
Assets
Corporate bonds
Cost benefit analysis
Credit default swaps
Economic crisis
Financial crisis
Innovation
Laboratory
Management
Management teams
Market timing
Mutual funds
Securities trading
Studies
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Summary:We use the financial crisis of 2007–2009 as a laboratory to examine the costs and benefits of teams versus single managers in asset management. We find that when a fund uses complex trading strategies involving the use of CDS team-managed funds outperform solo-managed funds. This may be due to the greater diversity of expertise, experience and skill of teams relative to single managers. During the financial crisis, however, the performance premium of teams becomes negative, which may be because of the slower decision times of teams, which are especially costly during times of rapidly changing market conditions.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2015.02.019