Bond Mutual Funds and Complex Investments

We are the first to analyze bond mutual funds' permission and use of complex investment practices like derivatives, restricted securities and securities lending. Based on unique regulatory information from the SEC's N-SAR filings, we show that most complex investments do not affect fund performance or risk. However, interest rate futures (IRF) are harmful to bond funds. Bond funds engaging in IRF (45.8% of all bond funds) underperform nonusers by economically meaningful 51 basis point p.a. (alpha). Further results reveal that bond funds employ IRF for speculation as they increase funds' exposure towards interest rate risk