Report: Derivatives Have Become Commonplace

Dec 5 2007 | 10:37am ET

Once regarded as specialized tools, North American institutions, specifically hedge funds, today use equity derivatives as a routine method of obtaining desired exposures and hedging positions. 

The Greenwich Associates' 2007 North American Equity Derivatives Research Study found that nearly 85% of North American institutions trade single-stock options, up from 81% last year, while nearly 80% trade index options, up from 74%. Hedge funds remain the most active users at 93% and 86%, respectively.

The report also found that the use of futures fell from 65% in 2006 to 61% in 2007. Just more than half of the hedge funds participating in the report said they are active users of futures. And although hedge funds are the market's most active users of exchange-traded funds, the share of hedge funds reporting use dropped to 71% in 2007 from 81% the previous year. Conversely, the use of ETFs increased sharply among mutual funds.

Also, nearly a quarter of institutions say they use variance swaps, up from less than 20% in 2006. Between 14% and 20% of institutions report using dividend swaps, dispersion/correlation trades, sector swaps, portfolio swaps, and access products. Hedge funds were said to drive activity in most of these categories.

"The 'flow' or highly liquid equity derivatives business is surging," said Greenwich Associates consultant Jay Bennett. "Last year, the institutions targeted in our research generated an estimated $420 million of commissions for brokers on options trades—over the past 12 months that amount jumped to an estimated $775 million."

"Futures and options have become standard tools such as 120/20 and 130/30 investment strategies—we expect equity derivatives use to continue its rapid rise," said Greenwich Associates consultant John Colon.

The study included over 200 active investors in the U.S. and Canada, including 80 hedge funds.


In Depth

High Time For A Cannabis Hedge Fund?

Sep 30 2014 | 7:07am ET

Launching a hedge fund is always a gamble, but Leslie Bocskor's decision to launch...

Lifestyle

Griffin Donates $1M To Rauner's Illinois Gov. Campaign

Sep 22 2014 | 9:29am ET

Hedge fund billionaire Kenneth Griffin definitely has a dog in this fight. The Citadel...

Guest Contributor

Appraisal Ratio Key To Evaluating Hedge Funds And Other New Investments

Sep 29 2014 | 3:07pm ET

As a former finance professor Peter Hecht experiences heartburn every time he hears...

 

Videos

Editor's Note

    Must Attend Hedge Fund Charity Events For October

    Sep 30 2014 | 9:29am ET

    The crisp Autumnal days of October are upon us, and so are a few of the hedge fund industry’s favorite charitable events. If you have never been to Rocktoberfest, well, you are missing out. And for a quieter evening of sipping and socializing, stop by HFC’s Wine Soiree. Read more…

 

Futures Magazine

September 2014 Cover

High frequency market making

High frequency trading is not evil, it is not a conspiracy and it really is not new; it is the natural evolution of the professional trading community making markets, providing liquidity and hopefully...

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.