Speaking at an ASX event in Sydney, Investment Trends qualitative research analyst Justin Lewis said a study conducted by Investment Trends involving fund managers, asset consultants, insurance funds and trustees indicated there is a perception that options are complex and difficult to explain to clients.
Mr Lewis said despite the potential downside benefits, fund managers are avoiding options since they involve explaining several different variables to clients as well as the different levels of premiums.
“It’s not a straight line explanation of what you’re going to do with it and how you’re going to profit from it,” said Mr Lewis.
He added that a “lack of in-house knowledge or expertise” is another barrier to options trading.
Many of the finance professionals who are trading in options have already had a “significant amount of experience offshore before coming to Australia”, according to Mr Lewis.
He said there was also a sense from the study that some of the senior investment managers in Australia have been in their roles for a long time and are “comfortable with the way they’ve been doing things”.
They may also have had bad experiences in years such as 1987, 2008 and 2011, he added.
The migration to index funds is another factor that respondents to the Investment Trends study said had contributed to the decline in options trading, given that “it takes away the need to be an active trader”.
“You still need to pay attention and watch where things are going, but if you’re following an index it’s a much easier process, so you don’t necessarily need to spend as much time playing with different options and different strategies,” said Mr Lewis.
The study also indicated that market consolidation had seen a decline in the use of options, with fewer companies managing larger funds leading to a reduction in the number of strategies and the number of things people want to trade.
Respondents also said the rise of SMSFs and a decline in hedge fund activity were other major factors leading to reduced interest in options.
In Australia, Mr Lewis said SMSF trustees generally have an adviser that will help them decide what to do with their fund.
“Typically, those types of advisers don’t have the specialised experience or don’t feel confident in explaining to clients the intricacies of options trading,” said Mr Lewis.
