Hedge funds are reshaping the multi-billion dollar European dividend market.
Traditionally, the Euro Stoxx 50 dividend futures have been heavily influenced by the hedging flows of structured products. However, a shift in issuance has allowed multi-strategy hedge funds to play a more significant role in this market, which typically use other types of derivatives.
As a result, the number of open contracts for Euro Stoxx 50 dividend futures listed this year has dropped to the lowest average level since 2010. According to a report in September, the broader contracts, including dividend options, currently traded on the European Futures Exchange are about 8 million, down from over 9 million at their peak in 2021.
Plummeting number of Euro Stoxx 50 dividend futures contracts
Thijs Grotenhuis, head of Delta 1 equity trading at Optiver, said: "We have not seen the trend of treating dividends as an asset class disappear. If anything, we have seen an increase in the use of dividend derivatives, especially multi-strategy hedge funds, which are using these tools to express fundamental views."
The Euro Stoxx 50 dividend futures, launched in 2008, have historically been used to hedge the dividend risk of a popular structured product known as autocallables, which are typically based on stock indices or single stocks and have barriers that determine when to exercise and pay. The exotic trading desks that issue autocallable products often use Euro Stoxx 50 dividend futures to offset dividend risk, which can sometimes cause significant selling pressure and chaos.
Advertisement
But the impact is not as significant now: since the turmoil in August, due to concerns about profit growth (especially for car manufacturers that often have higher dividend yields), dividend futures have underperformed the Euro Stoxx 50. However, Kieran Diamond, a derivatives strategist at UBS Group, said that the trading volume of these contracts has not surged as it did in the past during weak periods.
Dividend futures underperform the Euro Stoxx 50
He said: "While implied dividend futures have historically performed poorly during market downturns, some of the drivers of this downside beta coefficient have weakened in recent years," noting that autocallable products have shifted from index-based underlyings to single stocks.
Antoine Deix, head of dividend and buyback solutions at BNP Paribas, said that the environment of rising interest rates also partly explains the changes in the dividend market. He pointed out that the market is shifting from equity autocallable bonds to products such as fixed income derivatives.Due to the trading department selling call options to hedge funds, the trading department typically still holds a short gamma position, which can amplify volatility when market makers adjust their hedging positions to manage intraday fluctuations. Deix stated that despite this impact, the European dividend derivatives market has now become more developed.
He added: "We might see a reduction in the kind of chaos in the dividend market that we saw from 2008 to 2020."