Asset managers are looking for alternative products to gain tailored exposures to equity derivatives as their strategies evolve in complexity, a new study from Acuiti has found. 

The rise of thematic, ESG and climate investing has created demand from asset managers to trade tailorable baskets of equities in order to gain specific exposures. However, to date, investors have faced a trilemma with no available products in the post-crisis world offering capital and margin efficiency, low trading costs and customisability. 

The new Acuiti report, Solving the Investment Trilemma, which was commissioned by Nasdaq to coincide with the launch of its Custom Basket Forwards, found that asset managers were reducing OTC exposures in the wake of the Uncleared Margin Rules and other post-crisis reforms. 

However, this reduction has left asset managers seeking listed alternatives that provide the customisability of OTC markets but without the associated cost and complexity of managing ISDA agreements and trading OTC. 

The report found that ETF markets and currently available listed products go some way to meeting the demand but that there remained a significant gap in the market for a customisable listed product. 

“OTC market have traditionally played a key role for the buy-side in enabling them to build complex and tailored products to meet the specific requirements of their portfolios,” says Will Mitting, founder of Acuiti. 

“However, the rising costs and complexity associated with OTC derivatives has forced firms to look for listed alternatives. Our study suggests that Custom Basket Forwards (CBFs) can solve the investment trilemma for firms offering a margin efficient, customisable product with low trading costs.”

The report also found that asset managers are seeking to further reduce OTC exposures over the next three years. This provides an opportunity for the sell-side to promote listed products that solve the requirements of their clients. 

“As asset managers continue to innovate and meet investor demands for thematic, ESG and climate investments, the sell-side is well placed to offer access to listed products that can serve these requirements,” says Mitting.  

The Acuiti study found that banks see potential in CBFs to engage new clients and offer existing clients new products as well as bringing greater capital efficiency to the market. 

“The Acuiti report provides great insights to the industry trends behind the increasing demand for tailored equity exposures, as well as the challenges and complexity of managing them, with the use of OTC derivatives”, says Alessandro Romani, VP, Head of European Derivatives at Nasdaq.

“With the launch of Custom Basket Forwards, Nasdaq is well positioned to provide Asset managers and Sell-side firms with an alternative solution to OTC equity swaps, based on a listed and CCP cleared derivatives contract”, continued Romani.

Download the full report here: https://www.acuiti.io/solving-the-investment-trilemma