Asset Managers

Sam Priyadarshi

Asset managers have long used derivatives in the prudent portfolio management of exchange-traded funds, and closed-end and open-end mutual funds (collectively, “funds”). Derivatives have served as a fundamental tool to mitigate perceived risks presented by other assets, and to invest in assets synthetically in a timely, cost-effective and risk-mitigating manner. Derivatives are used to hedge against interest rate fluctuations, potential default on debt obligations, commodity price movements, foreign currency shifts and other market risks. Asset managers use derivatives contracts, such as swaps, options, futures and forwards, to achieve a number of benefits for fund investors – including hedging portfolio risk, lowering transaction costs and achieving more favourable execution compared to traditional investments.

Historically, the exchange-traded global futures and options markets have offered a limited range of standardised contracts with significant liquidity for both investing and hedging. The early 1980s saw the rise of over-the-counter (OTC) derivatives that effectively created a synthetic means in which to invest and hedge risks across a broad spectrum of asset classes. The