NEW YORK (HedgeWorld.com)– Single-stock futures were long in the making and then started slow in late 2002, but some brokers suspect the instruments may take off this year.
Demand for commodity futures and other derivatives has been booming recently, fueled partly by the growth of assets in global macro and futures funds. The same trend bodes well for the new instruments.
Futures and macro managers did well in 2002 and are likely to retain investor interest in 2003, as moves in currencies and interest rates provide increased opportunities. Moreover, commodity trading advisers, a natural constituency for single-stock futures because of their experience with other futures contracts, are increasingly using technical trading programs that involve stocks.
“This is going to be a watershed year for single-stock futures,” said Marc Cohen of Fimat USA Inc., the U.S. arm of Fimat Group, a global brokerage organization and part of Soci?t? G?n?rale. “But the jury is still out.”
One reason demand has been slow so far for the new instrument is that hedge funds have not yet embraced single-stock futures as part of their regular toolbox. Another issue is market liquidity–some traders feel there aren’t enough single-stock futures trades.
“Typically, new types of contracts are successful or unsuccessful depending on different kinds of developments,” Mr. Cohen observed. Sometimes an unrelated event provides the momentum that allows a market to take off, he pointed out.
For example, in the past year or so demand for swap futures contracts has grown noticeably. The financial ramifications of Enron for a number of Wall Street banks that were involved with the failed energy company apparently fostered interest in these contracts, because people have now become more sensitive to counter party credit risk. Consequently, swap futures, an alternative for those who prefer to avoid dealing with counter parties, is used more frequently.
One development that could give single-stock futures a needed boost is the difficulty of borrowing stocks for shorting, as the growth of short selling activity outstrips the supply of shares available for this purpose. Single-stock futures can be used to execute the same trading strategy without having to borrow securities.
On the other hand, using the contracts requires separate documentation, with additional forms to fill. It may be a hassle for some, said Mr. Cohen. “But if it gives you a cheaper or a more efficient way to express your trading ideas, it makes sense.”
Mr. Cohen and his long-time colleague Stephan Solomon joined Fimat last summer and created the Financial Services Group that serves hedge funds and commodity trading advisors. They were previously at Prudential Securities.