Growing number of investors using exchange-listed options
03 May 2018 Chicago
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More than 80 percent of institutional investors surveyed, who currently use exchange-listed options, are satisfied with the performance against major market benchmarks, according to a study by Greenwich Associates.
The research, ‘How Institutional Investors Use and Think About Exchange-Listed Options’, interviewed 80 institutional investors in the U.S., including asset managers, corporate pension plans, public pension plans and endowments with total combined assets under management of more than $1 trillion.
Greenwich Associates explained that the goal of the study was to identify target audiences and educational strategies for the Options Industry Council (OIC), an industry resource funded by OCC, that may lead to increased adoption of exchange-listed options strategies among institutional investors.
The study found that almost half of the asset managers surveyed are considering future investment in exchange-listed options strategies while over a third are considering over-the-counter (OTC) options strategies.
Exchange-listed options are deemed superior to OTC options by participants in the study, as they offer real-time price discovery, greater transparency, less regulatory complexity and since they are centrally cleared through OCC, there is reduced counterparty risk.
It also showed that 4 percent of respondents disagreed that options strategies could improve the risk-adjusted return profile.
It also found that while institutional investors primarily look to implement exchange-listed options strategies for portfolio protection, risk diversity is another key driver as the non-linearity of exchange-listed options strategies means their potential returns come with less risk exposure in the fund.
According to Greenwich Associates, although utilising options to enhance investment returns is not a new concept, the pension community has yet to widely embrace options strategies that could enhance yields while reducing risk.
The research showed that the main reason for not using options is that they are not perceived to fit with the fund’s primary investment strategy.
Another reason institutional investors avoid options, according to the study, is that the fund’s investment mandate does not approve them. However, the study noted that once institutional investors decide to invest in options strategies, there is a short due diligence process of six months to one year with most participants reporting the critical decision factor was buy-in from the chief investment officer.
Joseph Cusick, OIC director of institutional investor education, said: “The valuable insights gained from this study will support our continued efforts to provide the most relevant educational thought leadership to asset managers, pension funds, and endowments.”
“We want to lead deeper discussions with the institutional investor community on the strategic benefits of exchange-listed options and how exchange-listed options strategies potentially improve risk-adjusted returns and address the pension elephant in the room, which is underfundedness.”
The research, ‘How Institutional Investors Use and Think About Exchange-Listed Options’, interviewed 80 institutional investors in the U.S., including asset managers, corporate pension plans, public pension plans and endowments with total combined assets under management of more than $1 trillion.
Greenwich Associates explained that the goal of the study was to identify target audiences and educational strategies for the Options Industry Council (OIC), an industry resource funded by OCC, that may lead to increased adoption of exchange-listed options strategies among institutional investors.
The study found that almost half of the asset managers surveyed are considering future investment in exchange-listed options strategies while over a third are considering over-the-counter (OTC) options strategies.
Exchange-listed options are deemed superior to OTC options by participants in the study, as they offer real-time price discovery, greater transparency, less regulatory complexity and since they are centrally cleared through OCC, there is reduced counterparty risk.
It also showed that 4 percent of respondents disagreed that options strategies could improve the risk-adjusted return profile.
It also found that while institutional investors primarily look to implement exchange-listed options strategies for portfolio protection, risk diversity is another key driver as the non-linearity of exchange-listed options strategies means their potential returns come with less risk exposure in the fund.
According to Greenwich Associates, although utilising options to enhance investment returns is not a new concept, the pension community has yet to widely embrace options strategies that could enhance yields while reducing risk.
The research showed that the main reason for not using options is that they are not perceived to fit with the fund’s primary investment strategy.
Another reason institutional investors avoid options, according to the study, is that the fund’s investment mandate does not approve them. However, the study noted that once institutional investors decide to invest in options strategies, there is a short due diligence process of six months to one year with most participants reporting the critical decision factor was buy-in from the chief investment officer.
Joseph Cusick, OIC director of institutional investor education, said: “The valuable insights gained from this study will support our continued efforts to provide the most relevant educational thought leadership to asset managers, pension funds, and endowments.”
“We want to lead deeper discussions with the institutional investor community on the strategic benefits of exchange-listed options and how exchange-listed options strategies potentially improve risk-adjusted returns and address the pension elephant in the room, which is underfundedness.”
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