The Big Boys Discover Options
Other institutions follow Pimco in using puts and calls to battle stock-market risk. Global volatility leads to less reliance on modern portfolio theory.
IN THE RAREFIED WORLD OF endowments, pension funds and major asset- management companies, worries about risk are often quashed by modern portfolio theory.
The Nobel Prize-winning concept essentially contends that asset diversification alone is enough to reduce risk. Options, though designed for that very purpose, are historically viewed as an inelegant solution.
But the old biases could be fading, according to a study released last week by the Options Industry Council, an educational marketing group primarily funded by the options exchanges.
THE GYRATIONS in the global financial market seem to have upturned longstanding ideas in the investment community, including those about owning a variety of stocks or bonds to reduce investment risk. Even now, correlation is damaging many portfolios as different assets, including some stocks and bonds, increasingly trade like each other.
The OIC study suggests that the financial crisis has made endowments, pension funds and major asset managers more open to using options to reduce portfolio risk. This is a significant development. The common experience for derivatives salesmen traveling to Boston and other bastions of the money-management industry, is to be viewed by portfolio managers as people with two heads and one eye, trying to peddle exotic financial detritus.
