According to Greenwich Associates’ 2005 Equity Derivatives study, while a rising number of US institutions are using equity derivative ‘flow’ products to implement a wide variety of investment strategies, use of customised, structured and hybrid derivatives products has declined sharply to 30 per cent this year compared to 50 per cent in 2005. The remainder report use of so-called flow equity derivatives.
The study also found that the proportion using single-stock listed/vanilla over-the-counter (OTC) options has risen to 76 per cent in 2005 – up from 68 per cent in 2003. Over the same period, the percentage using listed/vanilla OTC index options had increased four points to 63 per cent, while 58 per cent (against 55 per cent) are now using index futures. Exchange traded funds are now employed by two-thirds of institutions, compared to 57 per cent in 2003.
“The rising employment of equity derivatives in such strategies as actively managed long-only equity, passive equity index and simple price speculation, suggests that a rising number of institutions are using equity derivatives instruments as a substitute for ‘cash’ equity trading,” said John Conlon, Greenwich Associates consultant.
A related study from Greenwich, which canvassed 167 institutions, indicates that European institutions using customised OTC derivatives rose to 85 per cent this year from 70 per cent in 2004. Over the same period the notional value of these instruments traded annually by the typical European institutions almost doubled to $820m. Average continental trading volumes rose to $805m in 2005 (2004: $430m), fuelled by a strong growth in Germany ($1.24bn from $335m).
RA
