Equity derivatives use increased significantly among institutional investors, contrary to popular belief, according to a report by Greenwich Associates.
In a study of institutional use of derivatives, Greenwich projected the number of users climbed to almost 250 from about 200 in the previous year's study. In addition, the amount of institutional equity derivatives trading rose by an average of almost 20%.
Over-the-counter derivatives continued to gain in volume. The report said structured equity derivatives grew surprisingly to represent one-third of all equity derivatives volume, with 23% of institutions trading structured equity derivatives weekly, and 10% trading them daily.
How institutions are using equity derivatives is changing, according to Greenwich. A large number of pension and endowment managers have stopped using equity derivatives to cap or leverage positions, compared with Greenwich's 1994 study, although slightly more are using them for asset allocation. Relatively fewer insurance companies and mutual fund managers are using equity derivatives for asset allocation, compared with 1994, but the proportion using them aggressively - such as to increase leverage - has doubled, the report said. Greenwich did not release exact numbers because it considers the information proprietary.
Equity hedging appears to be falling significantly. Just 58% of institutions reported the use of equity derivatives for hedging, down from 73% in 1994's study. But using equity derivatives for indexing, market timing and gaining international exposure all rose significantly, according to the Greenwich report. The proportion using equity derivatives for indexing rose to 40% from 31%, for market timing it rose to 29% from 23%, and for gaining international exposure, to 26% from 17%.