The use of ETFs and protective option strategies by delegated asset managers

Thesis event information

Date and time of the thesis defence

Place of the thesis defence

University of Oulu, Linnanmaa, TA105

Topic of the dissertation

The use of ETFs and protective option strategies by delegated asset managers

Doctoral candidate

Master of Science Hamed Salehi

Faculty and unit

University of Oulu Graduate School, Oulu Business School, Finance

Subject of study



Professor Anders Löflund , Hanken School of Economics


Professor Jukka Perttunen, University of Oulu

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The use of ETFs and protective option strategies by delegated asset managers

The secretive nature, opacity, and complexity of investment strategies employed by active asset managers lead to information asymmetry and to the agency problem. Under imperfect information, ex ante identification of skilled investment managers is difficult. Moreover, personal preferences may lead to investment decisions that play to the advantage of asset managers – who control the actions determining the distribution of investment outcomes – at the expense of asset owners’ objectives. Analysing investment actions that are prone to agency problems may aid in effectively gauging managerial skill and risk preferences.

This dissertation, comprising three essays, offers empirical evaluation of the use of exchange-traded funds (ETFs) and protective option strategies by utilising a novel data on institutional investors’ security holdings and one of the most comprehensive consolidated hedge fund data. The analysis of institutional investors’ ETF portfolios does not support the hypothesised ETF selection ability. Rather, ETF usage is associated with managerial incentives and investment constraints. Both a robust negative relation between ETF use and stock portfolio performance and the less active investing manifested by portfolios of ETF users suggest inferior stock selection among this subset of institutional investors.

The results also establish a strong association between the use of protective option strategies and a lower risk profile. In line with a costly hedging hypothesis, funds whose portfolios include protective option strategies earned countercyclical net-of-fee returns. More incentivised hedge funds with better past performance demonstrated greater likelihood of locking in their gains and insuring against the downside via protective option strategies, thereby increasing the realised fees.

Such research into use of ETFs and protective option strategies is important in two respects. It sheds light on the added value of these instruments in asset managers’ investment portfolios and provides insights into the implications of investment decisions that are susceptible to agency problems with regard to managerial skill and risk preferences. Alongside policy implications, the results have potential to improve screening and hence reduce investors’ search costs.
Last updated: 1.3.2023