Government Regulation Will Not Stop Derivative Losses Say Top Canadian Money Managers.
CONTACT: Ted Dixon, Survey Coordinator,
The Fraser Institute (604) 688-0221 ext. 549
EMBARGO DATE: June 22,1995
Media Release
Vancouver, B.C.>> Canadian money managers responsible for more than $230 billion in assets do not share the commonly held view that more government intervention will reduce derivative trading losses, a Fraser Institute survey has found.
Over the past few months derivative products have been in the news because some organizations have lost large amounts of money through the use of derivative products. "Canadian pension and investment fund managers surveyed do not believe that derivative trading losses are related to a lack of government regulation in the area," said Ted Dixon coordinator of the spring Survey of Senior Investment Managers.
"In our survey, managers identified inadequate supervision and control of derivative traders by their respective organizations as the most important contributing factor to derivative trading loses," said Dixon, "and this was followed closely by a poor understanding of the full risks associated with derivatives by investors".
Risky choices made by informed traders and investors was also heavily weighted as a reason for derivative related losses. Other factors mentioned include high commissions on derivative products, leverage and greed. Lack of government regulations and restrictions on the use of derivatives was not seen as a very important factor.
Canadian Equity Options Rank as the Most Popular Derivative Investment
The survey also asked respondents to list the types of derivative products they currently use. "Seventy six percent of respondents reported using at least one type of derivative product. Among those surveved, the most widely used derivative is the Canadian share option, " said Dixon.
Thirty-two percent of respondents indicated they use Canadian share options. This was followed by forward rate agreements (F.R A.'s) which are used by 26%. Canadian stock index futures/options, and international stock index futures/options tied for third place (24%). Interest rate swaps ranked fifth (22%). "Exchange traded derivative products appear to be more widely used and accepted than over the counter instruments," said Dixon.
Over The Counter Derivatives See Slow Acceptance Among those Surveyed
O.T.C. derivatives have not experienced wide spread growth among survey respondents. Participants were asked to describe their history with O.T.C. derivatives over last two years. While one third of respondents said that use of O.T.C. derivatives has grown, two thirds said that their use of derivatives has remained the same or has fallen.
Just under a quarter of respondents said that O.T.C. derivatives were either important or very important portfolio management tools. However, 35% said O.T.C. derivatives were not very important and 41% said O.T.C. derivatives were unimportant.
Most Fund Managers Surveyed Do Not Actively Hedge Foreign Currency Exposure
Respondents were asked if they actively hedge on an ongoing basis foreign currency exposure on all or part of their international equity holdings. Sixty percent said no while 40% said yes. "It appears that most fund managers want the currency exposure offered by international investments," said Dixon. Even fewer hedge their foreign currency exposure on-their international bond holdings. Only 24% said they hedge foreign currency on the international bond portfolios while 76% said they do not.
Background: The Survey of Senior Investment Managers
The Fraser Institute received 50 responses to its mail survey of 144 Canadian pension fund and investment managers. The Institute sent surveys to the senior investment officer at major investment fund management firms and pension divisions of Canadian organizations that manage their pension plans in-house. Responses were received between March 21 and May 2,1995. The respondents represent $140 billion of pension fund assets and a total of $230 billion of assets under management. The Institute conducts the survey quarterly and the results are available by subscription.
The following are the text and results of the questions:
Click here to view the results of question 1. Over the past few months, derivatives have been in the news because some organizations have lost large amounts of money through the use of derivative products. What factors do you believe generally explain these recent developments?
Click here to view the results of question 2. Which type of derivative products do you currently use?
Click here to view the results of question 3. Please indicate which best describes your history with derivatives
Click here to view the results of question 4. How important is the use of OTC derivatives in your portfolio management?
Click here to view the results of question 5. Do you actively hedge on an ongoing basis foreign currency exposure on all or part of your international equity holdings?