LONDON: Hedge funds are increasingly reshaping the multi-billion dollar market for European dividends.
Futures on Euro Stoxx 50 Index payouts have traditionally been heavily influenced by hedging flows from structured products.
But shifts in issuance have allowed multi-strategy hedge funds to play a more prominent role in the market, often using other types of derivatives.
As a result, the number of listed Euro Stoxx 50 dividend futures outstanding has dropped to its lowest average since 2010 this year.
The broader market, which also includes options on payouts, now counts around eight million contracts on Eurex, down from more than nine million at the peak in 2021, according to a presentation in September.
“We haven’t seen a move away from dividends as an asset class,” said Thijs Grotenhuis, head of equity Delta 1 trading at Optiver.
“If anything, we’ve seen a rise in the use of derivatives on dividends, particularly by multi-strategy hedge funds, who are using these instruments to express fundamental views.”
Launched in 2008, Euro Stoxx 50 dividend futures have historically been used to hedge the dividend exposure in a popular structured product known as an autocallable, whose underlying is often an equity index or single stock and has up and down barriers – pre-arranged levels that determine when it gets exercised and its payout.
Exotic trading desks issuing equity autocallables have typically used Euro Stoxx 50 dividend futures to offset the dividend exposure, which at times has created significant selling pressure and dislocation.
But the impact is not as strong nowadays. Since the August turmoil, futures on the index payouts have underperformed the gauge on concerns over profit growth, especially at carmakers, which tend to carry a high dividend yield.
And yet, the contracts haven’t had the spike in activity that used to be common around periods of weakness, according to Kieran Diamond, derivatives strategist at UBS Group AG.
“While implied dividend futures have historically underperformed in market declines, some of the drivers of this downside beta have reduced over recent years,” he said, pointing to a shift in autocallable products from index-based underlyings towards single stocks.
The higher rate environment also partly explains why the market for payouts has changed, according to Antoine Deix, head of dividend and repo solutions at BNP Paribas SA.
He noted a move towards products such as fixed-income derivatives, away from equity autocallables.
Due to their sales of upside calls to hedge funds, trading desks remain generally short gamma – positioning that can amplify moves as market makers adjust their hedges to manage intraday volatility.
Yet despite this effect, Europe’s dividend derivatives market has become more developed now, Deix said.
“We may see fewer of the kinds of dislocations in the dividend market that we saw from 2008 to 2020,” he added. — Bloomberg
