Derivative Instruments

Derivatives for fund managers - our top papers

Our experience is that Fund Managers appreciate papers which clearly describe practical ways of using derivatives to improve portfolio tradeoffs. Here are some of our most popular papers.

1. Overlay Strategies: Increasing Portfolio Diversification Through Derivatives (NEPC)

NEPC examine the uses and benefits of derivative overlays strategies. They document the value of overlay strategies for the securitization of unused cash, for rebalancing to maintain target allocations, and for transition management.

2. Fixed Income Overlay Strategies (PH&N)

This paper from Philips, Hager and North examines fixed interest overlay strategies, undertaken in order to manage aggregate portfolio risk. The strategies outlined are of particular interest to pension funds or other portfolio owners who wish to manage their term structure, to maintain target exposures or to seek to add alpha using derivatives.

3. Vix your portfolio - Selling volatility to improve performance (BlackRock)

This 28 page paper from BlackRock examines the practice of selling volatility in order to enhance portfolio returns. Their analysis shows that, historically selling volatility on a portfolio would have provided higher returns and with smaller drawdowns than a normal portfolio. The study is based on US large-cap stocks. The seller of volatility is likely to receive consistent short-term gains, which over the long-term comfortably outweigh the occasional sharp losses that may be incurred. Risk management and the sizing of positions is of course important, but if this is properly controlled, the paper argues that such a strategy will add long-term value, whether implemented using VIX futures, options or variance swaps. 

The authors recommend volatility sales as one of a number of different return factors to be used within a diversified portfolio.

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