The recent jump in global stock market volatility has made some hedging strategies more profitable, but most tax-exempt institutions don't appear to be interested.
The quickness of the fall and recovery of stock market prices, in the United States in particular, didn't give institutions enough time to put hedging strategies in place.
But the market volatility gave pension executives with hedging programs a psychological boost, if not a financial one.
And the increased volatility in stocks continues to create opportunities for added benefits to hedging and other derivatives strategies.
The market went down - and came back - so quickly it's questionable whether most institutions would have had time to put a hedge in place, said Jack L. Hansen, director of equity investments for The Clifton Group, Minneapolis.
The increased volatility has made straight hedging expensive, but hasn't affected other hedging strategies that are funded with short options positions, like collars and put spreads, he said.
But with the market rebounding to close to pre-correction levels, "here's a second chance to re-evaluate where we are," he said.
GTE Investment Management Corp., Stamford, Conn., has an ongoing tactical options strategy that has been able to capture greater-than-usual returns recently.
Michael de Marco, director-risk management for GTE Investment, said the increased volatility has made options strategies more rewarding, from a tactical viewpoint.
Compensation for options strategies is suddenly better, he said.
But GTE executives didn't take any unusual action as a result of the volatility; they just managed as they normally would. He declined to discuss specifically what GTE did.
Others agreed that options premiums are unusually great, making the purchase of puts for downside protection more expensive, but making the selling of options more lucrative.
"The premiums in the options have expanded," said William Melvin, executive vice president for options manager Acorn Derivatives Management Corp., White Plains, N.Y. "The options premiums go up and down with volatility."
Volatility, as measured by the Chicago Board Options Exchange Volatility Index, has increased tremendously, hitting levels that hadn't been reached since October 1987. The index is calculated using the implied volatility in the prices of Standard & Poor's 100 Index options traded at the CBOE.
As a result, Acorn's options selling strategy has produced greater returns in recent weeks, Mr. Melvin said.
He said investors have contacted Acorn about potential hedging strategies. "Interest is picking up only because people don't want to be left at the starting gate," he said.
And some existing clients have expanded their options allocation with Acorn in recent months.
Others in the industry noted existing investors with hedges in place got to experience the benefits of such strategies, on paper at least. Jonathan Muehl, investment consultant with Buck Investment Consulting in Pittsburgh, has helped to put collars in place for clients he declined to name. A collar typically involves buying put options, which rise in value when the market falls, and paying for the put by selling call options, which generally will create a loss as the market rises.
He said although one of the clients unwound a portion of a collar, with a gain, the rest held steady.
"Typically when the market drops like that they don't unwind," Mr. Muehl said.
Mr. Hanson of Clifton said the market volatility led to a couple of inquiries regarding its options hedging strategies, but no commitments to new programs.
He said investors with existing hedging strategies got a psychological boost from the cushion hedging provided while the market was down, but no economic gains, given the recovery of many of the affected markets.
He said the volatility did highlight the importance of rebalancing. Clifton's systematic derivatives-based rebalancing program was triggered by the correction:
"Our clients were beside themselves. They made millions."
