Religion and Derivative Use: Evidence from the Hedge Fund Industry

We examine how local religions influence derivative usage in the hedge fund industry. Measuring religiosity by the ratio of religious adherents in the county of a U.S. hedge fund headquarters, we find that religiosity is negatively related to the probability of hedge funds using derivatives for speculative purposes. In contrast, funds in regions with higher ratios of Catholics to Protestants are more likely to engage in speculation-based trading of derivatives. Finally, we show that the effects of local religion are more pronounced if the hedge fund size is small. Overall, our study highlights the significant role of local religion in shaping the purpose of hedge fund derivative usage.