Latest news with #structuredproducts
Bloomberg
2 days ago
- Business
- Bloomberg
Structured Products Gain Ground in Asia
Nicolas Rigois, Global Head, Capital Market Products & Solutions; Country Head Singapore, Standard Chartered discusses the rise of structured products in wealth management. (Source: Bloomberg)
Zawya
27-05-2025
- Business
- Zawya
Banks and hedge funds fuel US dividend trading boom: IFR
Trading in derivatives linked to dividends from US companies has surged to record levels this year following a sharp growth in the number of banks, multi-strategy hedge funds and other investors using the contracts to hedge – or wager – on changing dynamics in this corner of equity markets. Volumes in futures and options on dividends linked to US equity indices are up nearly 80% in 2025 to an average of about 9,400 contracts a day, according to CME Group. Trading volumes peaked in early April at the height of the US tariff turmoil when plunging stock markets sent hedge funds rushing to close out bets on short-dated dividend contracts and dealers had to hedge structured product exposures, traders said. That flurry of activity underlines how trading dividends – a mainstay of European equity markets for years – has now become big business in the US as greater investment opportunities have emerged following rapid growth in the closely linked business of banks selling structured products. 'The change we have observed in the marketplace over the last five years is the proliferation of hedge fund pods and the growth of delta one trading more broadly,' said Jeremy Rosen, head of delta one solutions for the Americas at BNP Paribas. 'There has been meaningful growth among hedge fund pods and that has led to US delta one products such as dividends [being] more discussed and relevant across many different equity trading desks.' Derivatives linked to company dividends emerged in the early 2000s for investors and traders to hedge or take a view on the future payouts companies are expected to make to shareholders, without taking exposure to moves in underlying stock markets. These contracts proved particularly popular in Europe where banks needed ways to manage exposure to dividends stemming from their structured products businesses. A typical structured product might involve a bank selling a retail investor a note that returns them their money along with a chunky coupon provided an equity index or stock reaches a certain level in a year's time. The expected dividend of the underlying shares usually forms part of that coupon, leaving bank trading desks sensitive to dividend payouts. Germany's Eurex launched dividend futures in 2008, aided by Europe's vast market for retail structured products. Last year, an average of over 82,000 contracts per day changed hands on the exchange. Playing catch-up Dividend trading has been slower to catch on in the US, in part because of differences in how the two equity markets operate. US companies pay smaller dividends, with most preferring to return money to shareholders mainly through stock buybacks. The US's smaller structured product market has been another factor capping growth – at least until recently when activity has mushroomed. Issuance of US SEC-registered structured notes rose by around a third last year to a record of about US$160bn, according to Goldman Sachs, amid widespread demand for US technology stocks from local and international investors. Elsewhere, there has been sharp growth in registered index-linked annuities, a product popular among US life insurers that encourages hedging with dividend futures. More than US$60bn of these RILAs were sold in 2024, according to Goldman, compared with less than US$20bn five years earlier. Riddhi Prasad, an equity derivatives strategist at Bank of America, said this activity may be behind a "steady flattening" of the US dividend curve in recent years because dealers use longer-dated contracts to hedge their positions. However, Prasad said the majority of the growth in dividend trading has been concentrated in shorter maturities. "This would suggest that, in addition to exotic product hedging by dealers, there are also numerous market participants engaging with US dividends for their fundamental value proposition," said Prasad. Appealing growth The number of unique accounts trading US dividends on CME has more than tripled over the last five years to 776 in 2024, the exchange group said. Traders say multi-strategy hedge funds that run numerous trading pods have become active in the market as structured product-related hedging has grown in prominence and made dividend trading more interesting. "Trading dividends in the US always used to be less attractive for investors than in Europe because there was less structured products activity creating an interesting opportunity set," said Luca Valitutti, managing director in exotics and hybrids trading at Citigroup. "Now there's been a surge in structured products issuance in the US since 2020. Various market parameters such as dividends have been affected by dealer hedging activity and that has increased the appeal for the buyside of allocating capital to dividend trading." Things came to a head in April when stock markets plunged after US president Donald Trump announced sweeping tariffs on US trading partners. Prasad said long-dated dividend futures briefly fell below shorter-dated contracts around this time – a phenomenon that could be linked to dealers hedging structured products. However, traders said the heaviest volumes came in shorter-dated futures as hedge funds suffered large mark-to-market losses in the turmoil, forcing many to close positions. Despite the recent volatility, the US dividend trading boom isn't over. Ironically, traders say that one appeal of the US market is that dividend yields are typically lower than in other regions, limiting the potential losses for investors. "If the dividend yield is 1% rather than 4%, the risk that a company cuts that cashflow is much lower in stressed scenarios," said Valitutti. 'The downside risk is much less pronounced in the US versus the rest of the world."
