Institutional fund managers are increasingly looking to innovative total return swaps to manage risk on a short term basis. And, underscoring the interest, the International Swaps and Derivatives Association is preparing documentation for total return swaps between equity and debt because these types of trades are becoming more common.
Serkan Bektas, director in institutional sales at Barclays Capital in London, says pension funds are using the swaps as a mechanism of exiting risk temporarily. The most common trades are based on swaps between a bond index and an equity index, but officials said pension funds will look to enter a swap in which they pay the performance of a portfolio they think will under perform in the short term, such as property and in return receive the a floating interest rate or exposure to another asset class. These bespoke trades are less liquid than traditional total return swaps, said Bektas, but they are increasingly popular.
