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.


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