Risk Disclosures Related to Credit Derivative Use by U.S. and German Corporate Bond Funds between 2004 and 2010 – An Evaluation
Risk Disclosures Related to Credit Derivative Use by U.S. and German Corporate Bond Funds between 2004 and 2010 – An Evaluation

Author(s): Dominika P. Galkiewicz
Subject(s): Social Sciences, Financial Markets, Socio-Economic Research
Published by: Udruženje ekonomista i menadžera Balkana
Keywords: Fund; Derivative; Credit default swap; Reporting; Disclosure; Leverage
Summary/Abstract: This study aims to investigate whether the comments made by funds regarding their use of CDS in periodic fund reports are consistent with their disclosed CDS holdings. For several funds in the U.S., the potential losses that may arise from selling CDS protection are almost as high as their net assets and in Germany, this potential can be even higher. The results of the study suggest that the comments provided by funds about their use of CDS in periodic reports are often vague and sometimes misleading. For instance, in Germany, funds that use more short than long CDS often claim that they only use long CDS for hedging purposes. This means that investors may need to analyze portfolio holdings to learn about the true investment behavior of funds. Based on the results, it is advisable for regulators in both countries to strengthen their monitoring activity and implement more standardized disclosure policies.

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