Cardano Risk Management, a Dutch asset-liability consultancy, plans to enter the U.K. market in the next six months to expand its customer base. The consultancy advises pension funds on which over-the-counter derivatives they should use to hedge the value of their assets, according toTheo Kocken, managing director in Rotterdam. It then invites banks to quote for the business.
The consulting firm is moving into new markets now because pension funds are increasingly looking to hedge their assets. Kocken explained that this is because fund managers are concerned that a weakening U.S. economy will cause a possible downturn in the global economy.
Kocken said a typical equity hedge that Cardano recommends is for a pension fund to buy a five-year at-the-money average price equity call option. These are attractive because pension funds are cash rich and therefore only suffer if equity markets underperform several years in succession. The average price option would give a guaranteed pay out and would only cost approximately 1% of the notional size. Kocken said the criteria for bank counterparties changes according to the pension fund it is advising.