Institutional investors have long been hampered (and oft-derided) for the oil tanker- like speed at which they reposition portfolios. Not only does this leave them open to the vagaries of the market but, once a decision to alter a portfolio allocation has been made, the fund is inherently sub-optimally positioned until the change can be transacted. For many institutional investors, that process can take several months.
“Certain end users don’t have the ability to take explicit short or leveraged positions because of regulatory constraints. These instruments allow them to do so without falling foul of the law.”
Ben Johnson
Increasingly, European institutions are turning to short and leveraged exchange traded products (ETPs) to increase their trading flexibility, both to generate alpha and hedge downside risk.
Access vehicles
According to figures from specialist short and leveraged ETP provider Boost, global AUM in short and leveraged ETPs reached $62.1bn at the end of March, 6.7% above where they started the year.
“Among institutions,” says Ben Johnson, director of passive funds research at Morningstar, “use of short and leveraged ETPs is primarily driven by regulatory arbitrage. Certain end users don’t have the ability to take explicit short or leveraged positions because of regulatory constraints. These instruments allow them to do so without falling foul of the law.”
As access vehicles, these products have historically appealed predominantly to smaller institutions, such as family offices and smaller pension funds, or those who lack the necessary infrastructure to trade derivatives, options or futures across the various asset classes they want to gain short or leveraged exposure to.
“These institutions are more likely to see ETPs as an access tool,” explains Townsend Lansing, executive director, head of short and leveraged platform at ETF Securities. “Exception may come with larger UCITS funds or other institutions who have not yet built the infrastructure or don’t trade the relevant asset class enough to warrant the cost of building it. These are generalisations, but as a general rule, the success of ETPs rests first and foremost on the fact they are exchange traded, cost efficient access tools. If an institution can get access directly, they are unlikely to use an ETP.”
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