Redefining derivative solutions for sedated markets

Challenges ahead for investors in sedated markets

If we are in the ‘ice age’ of financial markets, can derivative strategies begin the ‘big thaw’?

Derivatives strategies are more relevant than ever in today’s “sedated” markets, declared Jean-François Grégoire, head of global markets at Societe Generale, opening the SocGen/Risk.net derivatives conference in London on October 4. 

The amount of negative-yielding government bonds in the world – €15 trillion of them – was “mind-boggling,” he said. Volatility is structurally low, yield is compressed, regulators are continuing to put pressure on both the buy- and sell-side, as well as Brexit and trade wars – all impacting markets. Using the words of SocGen’s ‘permabear’ global strategist Albert Edwards, Grégoire said: “We are definitively in the ice age of financial markets.”

He continued: “To address these challenges, we think derivatives solutions are relevant and the right tool to help overcome these difficulties and generate alpha.”

With $28 trillion of assets under management represented in the room, the conference was geared to enlighten participants on how daily users of derivatives can adapt in markets and generate performance.

It is a challenging time to be an investor or indeed a bank, noted Duncan Wood, global editorial director at Risk.net, who was chair for the conference. 

In previous years, the event has focused on where and how to generate returns using derivatives-based strategies. While that emphasis continues, and looking at fixed income as an example, where a large proportion of the world’s bonds promise to yield less than nothing over their lifetimes, there are three responses that can be made, all of which involve a difficult trade-off. 

“Traditional bond portfolio managers can chase yield by travelling down the credit yield curve at the cost of increased default risk. They can play around with term structure, which obviously requires longer durations and increases rate sensitivities to maintain their returns. Or they can transition to alternative, less liquid structures,” said Wood.

Throughout the day, workshops focused on these ideas as well as looking at when and how to run a business, and how to strategise more efficiently while seeking alpha.