John Colon, a consultant at Connecticut-based Greenwich Associates said the growing use of equity derivatives across various strategies suggests a rising number of institutions are using the instruments as substitutes for cash equity trading.
Investors are opting for derivatives because of the ease with which the instruments help them gain leverage and anonymity, alongside beneficial tax treatment, Greenwich said.
However, US institutional investors’ use of some complex products, such as variance swaps and fund-linked and index-based products, has dropped by 20% during the past year. In contrast, European institutional investors have increased their use of tailored OTC, securitised, and hybrid derivatives by 15% over the same period.
This growth has been largely driven off the back of the popularity of structured products with the European retail and high-net worth (HNW) clients of dealers in Europe. According to Greenwich, only 5% of US dealers on-sell structured products to their retail and HNW client base.