Once regarded as specialized tools, equity derivatives today are used by North American institutions as a routine method of obtaining desired exposures and hedging positions, according to a survey by Greenwich Associates.
The survey reveals that it is becoming common practice at North American institutions for cash portfolio managers to work in conjunction with traders and equity derivatives specialists to achieve investment goals.
As equity derivatives move into the mainstream, the use of liquid “flow” products like options, futures and exchange traded funds(ETFs)has become ubiquitous among U.S. institutions. In addition, the universe of equity derivatives investors is expanding as a growing number of hedge funds enter the market.
All 2007 participants use flow equity derivatives, with 84% using single-stock options, 79% using index options, 65% using ETFs, and 59% using index futures.
“The flow equity derivatives business is surging,” says Greenwich Associates consultant Jay Bennett. “Last year, the institutions targeted in our research generated an estimated US$420 million of commissions for brokers on options trades—over the past 12 months that amount jumped to an estimated $775 million.”
Although the use of structured/securitized equity products is much less common among North American institutions, it too is on the rise. Forty-two percent of study participants in 2007 say they use structured equity derivatives, up from 34% last year.
There were 154 institutional investors based in Canada and the United States that participated in the survey.
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