Underfunded Pensions Can Look to Listed Options05.14.2018
Where can domestic pension funds got to help address their investment needs?
While it doesn’t grab the headlines like President Trump’s tweets, Korea, China, bitcoin or Jeff Besos, the current state of many pension systems being underfunded, there is help. Alternative investments such as private equity and illiquid credit, many funds are still overlooking another tool that improves risk-adjusted investment returns and helps restore funding levels: exchange-listed options.
Virtually all the institutional investors participating in a new study from Greenwich Associates acknowledge the potential benefits of options – only 4% doubt that options can improve the risk-adjusted return profile of a fund or investment portfolio. However, only 17% of the pension funds participating in the study invest in OTC options, and only 46% invest in exchange-listed options.
“Although utilizing options to enhance investment returns is hardly a new concept, the pension community has yet to widely embrace a variety of well-proven options strategies that could improve returns while still minimizing risk,” said Richard Johnson, Vice President of Market Structure and Technology at Greenwich Associates and author of a new report, “How Institutional Investors Use and Think About Exchange-Listed Options”.
Listed options are considered superior to OTC options across multiple factors, including real-time price discovery, greater transparency, lower regulatory complexity, and reduced counterparty risk. Across all types of institutions, 81% of current exchange-listed options investors are pleased with the performance versus major benchmarks. For these reasons, some pension funds have already started using exchange-listed options to help them decrease portfolio volatility, increase yields, and implement portfolio protection.
Other institutional investors may be prohibited from taking exposure to derivatives. Some of these investment mandates may be outdated and, as they are redefined or new ones are drawn up, consideration should be taken to ensure it they are appropriate for the fund’s objectives and the current evolution of the capital markets.
“While certain derivatives strategies can be risk-enhancing, many other strategies are designed to mitigate risk and improve risk-adjusted returns,” said Johnson.
The new report, “How Institutional Investors Use and Think About Exchange-Listed Options”, by Greenwich Associates was sponsored by The Options Industry Council (OIC) and explores how institutional investors are embracing active management approaches by using exchange-listed options strategies and analyzes the types of options strategies being implemented by U.S. institutional investors.
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