Are Derivatives The New Hedge?

As institutional investors choose options and other derivative products to insulate diversified portfolios, this would be an important trend to observe. 

The popularity of bond products has nosedived in the COVID- hit markets with their consistently low yield. Another key factor has been quantitative easing. High liquidity in the market has prompted HNW's and fund managers to invest this money in high growth products. Now companies and banks are swapping liquidity to curb the loan product yield. By lending out this excessive money, banks also lower the interest rate of loan products while still managing to rake earnings. 

Taking this concept forward to how it’s impacting investment trends, we see fund managers using more and more derivative products to hedge risk, as opposed to relying on the traditional 60/40 equity to bond investment in portfolios. 

Fund Managers like Ardea Investment Management propose using interest-rate derivatives to generate returns, which accounts for about 60% of the $15 billion that the firm manages. Capstone Investment Advisors leverages swaptions to counter the risk in a way that yields drop back toward record lows. While cryptocurrencies are yet another choice, derivatives serve better to boost returns or curtail losses from underlying assets that fail. 

While this strategy is available to more sophisticated and uber rich investors, it’s a key trend that I hope you can discuss like a pro to impress during interviews and networking meetings!

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