Yes, the equities markets are on a roll; the bulls are boisterous, and the “buy and holders” are popping champagne corks. Given this scenario, who would even suggest the idea of a fiduciary fund manager employing option-based hedging strategies that can potentially cut into upside returns?? After all, even though major exchanges throughout the globe have facilitated option-based hedging products for almost 30 years, options are “too complicated,” right?
OK, I’ll admit that I’m hearing about the “growing number” of large institutional managers that are using options, but options are just too complicated for all but those few MIT-educated portfolio managers who have found themselves working for a select group of forward-thinking and open-minded institutions.
Am I right?? I mean, gee–if I’m a long-only hedge fund, an RIA, an endowment, a pension manager, a family office, or a corporate treasurer, I have to not only figure out what a strike price is, but I need to figure out the difference between a call and a put, I have to consider tax implications, calculate break-even points, and I have to worry about the risk of stocks being “called away”, and when that happens, I lose out on the gains that I know will come, because I only pick stocks (or ETFs) that will go up at least 10%-15% within a few months of buying them, and more likely, 20%-30% over the next two or three years.
Well, if you’re a fund manager that’s been walking and talking the markets for more than a few years, you might know that bulls and bears make money, and pigs get slaughtered. Other than single stocks such as AAPL, equities markets (just like any other asset class) are cyclical. Prices go up, down, or they go side-ways.
Surprise! After almost 30 years of tepid use by fund managers handcuffed by mandates, the use of options by responsible and conservative institutions is finally gaining traction.
At the most elementary level, option-advocates talk about buy-writing, the most simplistic strategy; after all, in a column courtesy of TradersMagazine, “studies show that buy-write strategies outperform buy-and-hold strategies with less risk. One of the most recent studies was conducted by the University of Massachusetts and sponsored by the Options Industry Council, a think tank for the industry.”
The university’s analysis, using the Russell 2000 as a benchmark, “suggested” that the strategy’s return over the years between 1996 and 2011 bested that of the index itself. Caveat: the authors of the study, however, noted that the “method of execution of the strategy as well as the choice of the options” has a big impact…”
According to David Beth, an options industry expert and Pres/COO of institutional brokerage WallachBeth Capital, “For the better part of my 25-year career, its been a “push-pull” relationship as far my advocating the use of option strategies to fund managers. When speaking with even the most sophisticated funds, 1 in 10 would ‘get it’; they were either already using options, or they were ready to start implement hedging strategies. The balance would say “thanks for the information.”
Added Beth, “But more recently, whether because of the increasing volatility, or more likely, a much better awareness and understanding about option products in general, we’re on the receiving end of calls from Tier 1 RIAs, hedge funds, endowments and even pension funds, all of whom asking us to help implement a variety of option-specific strategies in single stocks, indices and ETFs.”
For the full article from TradersMag, simply click on the logo: