Asset Owner Insights survey: FX forwards most favoured among derivatives

Asset owners are increasingly looking to derivatives amid regulatory changes and a low-yield environment, with forwards and Swaps being the most popular choices.
Asset Owner Insights survey: FX forwards most favoured among derivatives

In the latest Asset Owner Insights survey, respondents said that their favourite risk management instrument was foreign exchange (FX) forwards and futures, with 25% saying they use it in fixed income and 20% in equities.

The survey covered 70 asset owners across Asia Pacific with a total of $5.3 trillion assets under management and was conducted in the third quarter of this year.


The second most popular derivative instrument used was futures, with 17% of asset owners stating that they use futures in both fixed income and equities, and 14% said they use Swaps in fixed income but only 7% use it for equities.

The use of equities options versus fixed income options differed greatly too, with 17% applying the strategy for equities compared with 9% for fixed income.

Julien Kasparian, chief executive officer of Hong Kong BNP Paribas Securities Services, told AsianInvestor that he has observed increasing use of derivatives by asset owners, particularly with bond forwards, long-term cross currencies, index Swaps and quantitative investment strategies.

“FX forwards and futures have already been used by asset owners. We see a growing interest for ad-hoc forwards and swaps on bonds and quantitative strategies or global indices,” he said.

Several factors drive this interest, such as the current yield environment (which drive up the appeal for bond forwards), and regulatory constraints, for instance the duration extension on FX hedging.

Asset owners are also looking to optimise their operational setup, he said. “For example, by using derivatives that mimic a rolling put option program, or trading World MSCI Swaps rather than purchasing their own multiple stocks.”

A majority of respondents also said that they adopt derivative policies purely for hedging purposes, with about a quarter saying so for both equities and fixed income. But Kasparian said he has not observed such a phenomenon.

“The derivatives are not frequently used for hedging. However, there are instances of asset owners buying out of the money option from time to time,” he said.

At the A$60 billion Cbus, head of total portfolio management Mark Ferguson told AsianInvestor that the fund uses derivatives for "export exposure management, efficient portfolio management and rebalancing. So increased efficiency in terms of not having to buy and sell physical securities all the time. That's our main use of derivatives," he said.


Within the region, China in particular offers up opportunities for investors with the reshuffle of the QFII and RQFII schemes last November, which has made it easier than ever for foreign institutions to invest in the country, Kasparian of BNP Paribas said.

"Many hurdles or requirements were lifted or softened, and the scope of eligible instruments and types of investment trades enlarged," he said. "The launch of the new Shanghai-based Star market stock exchange board has also attracted a lot of interest from asset managers around the world."

"As a result, we have seen a quite significant wave of new QFII investors (close to 150 since November 2020); this trend should continue with the recent addition of commodities futures and options and index options."

"We believe the market will continue to evolve positively as the result of Chinese authority’s opening up policies and the growing importance of the Chinese equity market in international portfolios (second largest in the world, and now fully included in global indexes)," he said.

In addition, the Chinese securities regulator in October announced that it would allow investors under the QFII scheme to trade commodity futures, commodity options and stock index options starting from November onwards, opening up further opportunity for investors. 

The survey was conducted by Asset Owner Insights, AsianInvestor's proprietary data platform. Read more from the survey results:

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