Derivatives Traders Get Attention

Some large investors expect to put more money into futures and options trading funds while reducing their allocation to private equity.

Global macro and managed futures look to be the winners in a slow-motion shift away from strategies that rely on credit and require long-term locking up of capital. Many institutional portfolios contain small investments in macro and futures – ranging from 5% to 15% of the overall portfolio– and some have none. But interest increased in response to the 2008-2009 experience.

Part of the advantage of trading futures and options is that a little capital goes a long way and no credit is required. The instruments can be traded with only small margins while  taking advantage of opportunities in many markets, ranging from bonds and currencies to commodities and stocks. Because futures can be bought and sold relatively easily, the funds that trade them tend to be easy to redeem.

By contrast, in private equity big gains in the past came from leveraged buy-outs that were dependent on readily available credit. Lock-ups last seven years or longer to allow the sale of portfolio companies.

In the 2009 credit crunch, endowments and foundations found themselves unable to raise needed cash because the private equity interests they held could not be redeemed and proved impossible to sell at reasonable prices. As a result these institutions are now wary of private equity.


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