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Derivatives

Single-Name Variance Swaps Mart Expands Five-Fold

Liquidity in variance swaps on blue-chip European single stocks has increased around five-fold in the last six months.

Liquidity in variance swaps on blue-chip European single stocks has increased around five-fold in the last six months. Volatility hedge funds are credited with driving demand for the product, which allows them to make dispersion trades by playing a single-name variance swap against an index variance swap. However, participants now include prop desks and even fund managers with concentrated exposure to volatility, said Clemens Lansing, head of flow derivatives at JPMorgan in London. The variance swap market started in earnest late last year, when several major derivatives houses--including Citigroup and JPMorgan--started offering the instruments (DW, 10/27 www.derivativesweek.com).

Variance swaps can also be used by absolute return portfolio managers, said Mike Chadney, head of structured products and derivatives at Henderson Global Investors in London. Henderson has already used the products, but is also looking at using these types of derivatives in regulated wrappers, such as [Undertakings for Collective Investment in Transferable Securities']," he added.

Tim Hart, managing director in institutional derivatives at Deutsche Bank in London, agreed that the latest UCITS guidelines could further expand the market for single-name variance swaps. "I think it's likely to take months or quarters, however, before this growth area is reflected in the market," he noted.

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