For executives at the Chicago Mercantile Exchange and Chicago Board Options Exchange, it's one thing to talk up the benefits to pension funds of using futures and options in risk management and portfolio investing. But it's another thing evidently when they're talking about their own pension funds, for which they are fiduciaries. In that case, it's not easy for them to make an allocation to derivatives.
The CME now has its first opportunity to move into managed futures in its $5 million defined benefit fund. The fund is searching for its first outside manager. William J. Brodsky, the CME's president and chief executive officer, said it is looking for a single manager to run diversified stock and bond portfolios, including domestic equity indexing and international.
Because the fund is now run in-house, it is prevented by government regulations from investing in futures, he said. By moving to outside management, Mr. Brodsky said in response to a question, it is possible the fund may consider adding a managed futures portfolio or some other derivatives strategy. But adding a derivatives strategy is not driving the move to external management. The exchange might invest in managed futures only if it can overcome the problem of appearing to show favoritism to a particular manager, he said.
"We have a another level of decision-making most institutions don't have," he added. "We are the Merc. We are dealing with people who are our members and our customers." Speaking of its pension fund, he said, "Because it's so small, it's not something we made a high priority. But no matter how small it is, if we pick one manager, it may create problems."
The Chicago Board Options Exchange - which revolutionized investing by pioneering options trading - is like the CME. It offers no investment portfolio using an options or other derivatives strategy for its $43 million 401(k) plan, its only pension program.
(As for the Chicago Board of Trade, the city's other world-renowned derivatives exchange, a spokesman said its executives won't comment about its own pension fund investments.)
Executives at both the CME and CBOE have had opportunities to introduce derivatives strategies to their pension funds. But they didn't.
Last year, the CME restructured its $25 million 401(k) plan, hiring FMR Corp.'s Fidelity Investments, Boston, to provide a bundled package of record-keeping services and investment portfolio choices. "We were spending so much on record keeping," said Mr. Brodsky, noting the overriding reason for the choice. A Fidelity spokeswoman said the firm doesn't offer any funds with derivative-based strategies.
At the CBOE, Alan J. Dean, first vice president, chief financial officer and corporate secretary, said the exchange added, as of Oct. 1., two investment portfolios to its 401(k) plan, an equity index fund and investment-grade bond fund. The additions bring the plan's total investment portfolios to eight, also all run by Fidelity.
Anyway, "Options aren't intended to be used by themselves; they are meant to be insurance or hedging vehicles," Mr. Dean said. "Our plan participants are around options all day long. You'd be surprised how conservatively they treat their own investment money. The logic is their jobs are so closely tied to options and the equity market, they don't want their pension funds going down along with their jobs" if the markets collapsed.
But options and other derivatives are supposed to be tools to mitigate market risks and enhance returns. If used properly, they should make even an options trader's portfolio safer.
Mr. Dean said the exchange didn't look for money managers offering options-based strategies that might be used in 401(k) plans. But a number do, including Gateway Investment Advisers Inc., Milford, Ohio. Gateway executives didn't return phone calls to see if they've ever marketed their options index fund to the exchanges. But then, there hasn't been much reason so far to market to prospects like these.