Tue. Oct 19th, 2021


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Investors are increasingly turning to derivative strategies to protect them from a slowdown in the US $ 51 tonne stock market, suspecting the hot rally will begin this year steam running out.

Major institutional money managers have already shown a nervous tilt selected in recent weeks for funds that are likely to perform well in more difficult economic or market environments.

Now they are trying to protect some of their double-digit profits this year while still investing in the market, as concerns about the spread of the Delta coronavirus variant and delayed global growth have tempered expectations for further stellar returns. shares.

“Investors need and want stock market exposure, but do not want to take full risks with markets that are always the highest,” says Paul Stewart, a portfolio manager at Gateway Investment Advisors.

Gateway manages one of the largest call transfer funds, a term used to describe a put options strategy linked to the S&P 500 index or individual stocks to strengthen a stock portfolio.

The derivatives give the buyer on the other side of the trade the right to buy a stock or the index at a pre-agreed price above where the market is currently trading. If the market price simply runs or even falls, the call override fund will get no payout but will still collect a premium for selling the option, which increases the return.

This year, the strategy ran behind the overall stock market. While the S&P 500 returned more than 20 percent, the CBO’s S&P 500 buy-write index, which follows the call-selling strategy, reached a smaller 14.5 percent.

Investors turn to call transfer funds as the market rises

But a quick demand for some funds suggests that the fortune of the strategy is expected to change.

Call transfer funds, according to investment bank Barclays, recorded their largest monthly inflow in July since 2012, even without the shifts through pension funds and donations in separately managed accounts, out of sight of public mutual funds. JPMorgan Asset Management earlier this year due to its strong inflow, one of its hedged equity funds closed for new investors.

“The stock market is up 20 percent so far,” said Michael Purves, founder of Tallbacken Capital. “People say they still like the story, but that it’s not going to be that good going forward.”

Bankers also say they are making more requests for these types of transactions.

James Masserio, co-head of equities and equity derivatives for the Americas at Société Générale, said his bank’s commercial bank has an increase in the interest of investors who want to rewrite calls on existing and new equity positions.

“It’s still a strong strategy,” he said. “You hope the market rises, only that it grows in a controlled way.”

Bar graph of annual total return (%) showing call exceeding strategies, the S&P 500 has declined in hot markets

Rish Bhandari, a senior portfolio manager at hedge fund Capstone, said the demand is particularly evident from public and corporate pension plans as their assets have increased significantly along with the stock market. This has led some to switch to these call-overwriting strategies, as they are at the best funding level since the start of the financial crisis in 2008, according to data from the actuarial group Milliman.

If the market rises above the rising prices on the call options and the pensions are forced to sell the shares they own, they are content to limit their profits and reduce their shares, Bhandari added.

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