The final session of the first day of CBOE RMC was a panel discussion titled “Real Money:  Institutional Liabilities and How Options Strategies Can Help” moderated by Jon Havice from DGV Solutions.  The panelists were Neil Rue from Pension Consulting Alliance LLC, Adam J. Smith, CFA, CAIA, from Mercy Health, and David Warn from The University of Chicago Office of Investments. 

Jon Havice started things off with a discussion of institutional liabilities in the form of defined benefit plans.  He noted that the average plan is about 75% funded looking at defined benefit plans being run by companies (not public plans).  He discussed the under funding in a variety of ways and then noted how the strategy demonstrated by the CBOE PutWrite Index (PUT) demonstrates strong performance when the stock market is not outperforming average returns.

Neil Rue started out noting his firm advocates using option overlay strategies and that a state fund recently committed a portion of their portfolio to an overlay strategy.  He noted that many plans are underfunded and also have many participants preparing to retire which exacerbates the problem.

Another interesting comment from the panel addressed the reluctance of funds to use options.  There is still an attitude where managers do not think of derivatives as risk control tools.  A plan sponsor who has an unwarranted negative impression of derivatives will dictate to a manager that they are not permitted the use of options which ties the manager’s hands with respect to enhancing performance or managing risk.

Finally, one of panelists who is allowed to use derivatives noted an extra benefit of using options to manage downside risk.  He noted that when his portfolio is hedged he actually has the ability to take on more risk with respect to other investments since he has the peace of mind that goes along with having a hedged portfolio.