Mostly… fixed income and cross product eTrading

July 24, 2007

Derivatives

Filed under: Nuts and Bolts — holky @ 6:06 am

Following on from previous post on derivatives, Financial News claims Fund managers (representing 100 of the largest European Asset Management firms) believe lack of understanding by clients about derivatives, the rapid growth of credit default swaps and collateralised debt obligations, and the potential for mis-selling by investment banks of complex structured products are the biggest risks facing the derivatives markets.

Despite the perceived risks in the credit derivatives market, mainstream asset managers are increasing their use of the instruments. The survey found the number of mainstream European fund managers using credit derivatives had doubled in the past year to one in four. A third of respondents expected to increase their use within the year.

However, investors in CDOs are predominantly banks, hedge funds and professional asset managers that should be in a position to evaluate the risks. It is thought hardly any pension funds invested directly in the vehicles.

The survey revealed growing sophistication in the use of derivatives by mainstream asset managers, with increasing emphasis on using the instruments to boost returns as well as to hedge risks. Nearly one in five managers said they were using volatility derivatives, which enable them to bet on whether equity markets will be more or less volatile in future.

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2 Comments »

  1. From experience, it was hard enough, at times, to explain why it may be good for a Pension Trustee to think about corporate bonds as part of their mandate, let alone CDS!

    However Asset Managers are using derivatives more and more in their pooled funds (institutional and retail) and, of course, their leveraged funds.

    Pension Fund Trustee education is always an issue. Investment Consultants should help, usually, but ultimately if a Trustee reads about a credit crunch and how credit derivatives are “weapons of mass distruction” (the least sage-like comment from the great man of Omaha?)…welll….

    Comment by waratah — July 24, 2007 @ 7:42 am

  2. […] In another update (following on from previous derivatives post) we learn that pension funds’ use of derivatives to hedge liabilities has trebled as managers […]

    Pingback by Derivatives, again « Mostly… — August 11, 2007 @ 5:12 am


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