04.23.2013
By Terry Flanagan

Buy Side Eyes Options

Options continue to gain appeal in the eyes of institutional investors.

Usage of options at Pyramis Global Advisors “is definitely trending higher,” said Young Chin, chief investment officer at the $188 billion asset manager. “It’s an important area in how it provides a low-cost way to manage risk.”

It has been a long road in gaining a foothold in the rarefied air of large institutions, which are traditionally known for conservativism in their investment style. A perception pothole was hit in the financial crisis of 2008-2009, when many market observers blamed the catch-all asset class “risky derivatives” for touching off the market mayhem.

But rather than try to prove a negative and assert that options don’t add risk, the Options Industry Council has taken a sort of ju-jitsu approach in its outreach, i.e. using the other side’s force to its advantage. Working on the premise that institutional investors want risk management, the trade group emphasizes that options provide risk management — so the net result of a properly executed options strategy is reduced risk.

 “OIC only teaches and educates on options as a risk-reducing and income-generating tool,” said Alan Grigoletto, vice president of education at Chicago-based OIC. “It has strong appeal to a conservative portfolio manager.”

For options exchanges and trade handlers, pensions and other large institutional investors are the most coveted end-user demographic. It’s great to bring in new retail traders and wealth advisors, but at perhaps a few million dollars per account, it takes a lot to move the needle; for an institution with 11 or 12 figures under management, even a very small percentage approved for hedging via options results in meaningful order flow.

Many institutions are eyeing options or wading in to trading the securities, but in many cases the indicated comfort level still exceeds actual usage.

 “We use options on a couple different fronts, but not to a major extent,” Chin told Markets Media. “For example, there may be certain equity positions that we’d like to have but in the near term we see some potential turbulence, so we might use derivatives to reduce exposure temporarily without necessarily selling out of that position. We also use derivatives in some of our hedging strategies with respect to absolute returns, for example we might use derivatives to enable short positions.”

READ THE FULL ARTICLE IN MARKETS MEDIA’S OPTIONS REPORT, WHICH WILL BE DISTRIBUTED AT THE APRIL 24-26 OIC CONFERENCE IN LAS VEGAS

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