US funds piled on index hedges ahead of stock selloff

US mutual funds were positioning for an equity market selloff in the third quarter of last year, as climbing inflation increased pressure on the Federal Reserve to taper its bond-buying programme and hike rates.

Managers added over $5.5 billion of bought index puts – setting a new high-water mark – according to an analysis of the sector’s regulatory filings. By the end of the third quarter, the total notional value of bought puts stood at $64.7 billion, up from the $59.2 billion book reported in the prior quarter.

While the sector’s bearish put options position was growing, bullish bought calls shrank to $5.5 billion from $11.9 billion in Q2.

The data is compiled from filings made to the US Securities and Exchange Commission that have been gathered and analysed by Risk.net’s Counterparty Radar service. The data series covers the seven quarters from the start of 2020. Filings made between July 1 and September 30 last year were aggregated to create the third-quarter ranking, with each filing providing a snapshot of positions on the funds’ books. Notional values are not included in the filings, so had to be inferred by combining the number of contracts and number of shares per contract, then adjusting the result by the reported strike – the methodology is described below (see box: About this data). 

Mutual funds mostly held options on the S&P 500, reflecting the dominance of US asset managers among SEC-regulated mutual funds. In total, the notional value of all S&P options hit $119 billion in Q3, up from $110.8 billion in Q2.

Managers also increased their holdings of Nikkei 225 and Russell 2000 options but cut their Euro Stoxx 50 and Nasdaq 100 positions.

Calamos reported the largest index options book, with roughly $16 billion in total notional. The Illinois-based manager added $3.5 billion to its book compared to Q2, surpassing Gateway Investment Advisers and Columbia Threadneedle, where reported positions were roughly flat.

Calamos also reported the quarter’s two biggest trades – sold calls worth $2.7 billion and $2.4, respectively, both having a September 30 expiration date.

Elsewhere, JP Morgan Asset Management’s book ballooned to $11 billion from $5.4 billion – vaulting the firm from tenth to fifth place in the ranking of managers by total book size. That’s despite the firm reporting only seven trades, or five less than the second quarter. No other manager in the top 10 registered fewer than two dozen tickets.

About this data 

The information used in this analysis comes from Nport-P filings to the US Securities and Exchange Commission. This is a relatively new form, introduced at the end of 2019, which requires mutual funds and exchange-traded funds to file monthly summaries of their portfolio holdings to the SEC.  

The filings include over-the-counter derivatives trades that were live at the time of the filing, and show details such as bank counterparty names, currencies, trade sizes and remaining maturity.

The forms are filed to the SEC on a monthly basis, and the regulator makes the final filing of each fund’s quarter public 60 days after the end of that period. The filings are in a structured XML form, making it possible to download and parse the data for trends.  

It’s important to caveat the information. While these are pro forma regulatory filings to the SEC and should be accurate, mistakes and miscategorisations do occur. The data was cleaned and obvious errors excluded. 

Notionals for equity options are not included in the filings, so have been calculated independently by Counterparty Radar. This involved multiplying the reported number of contracts by the number of shares per contract, and then multiplying this figure by the strike price.

The resulting strike-adjusted notional may differ from funds’ annual or semi-annual reports, which often use the spot price at time of filing instead of the strike. We chose to use the strike price to allow for quarter-to-quarter comparability – otherwise notional amounts might change solely due to changes in spot prices. The methodology is based on feedback from market participants, but if you have any comments please contact us, using the details below.

As the database is updated and improved periodically, data presented may not mirror information published in previous stories. Each story reflects the most accurate representation of data at the time of publication. 

Information from these filings is the basis for the new Risk.net service, Counterparty Radar, which allows users to search the filings information themselves to discover the most popular dealers and most active managers for a range of OTC derivatives – the addition of single-stock and equity index options takes the number of instruments covered to eight, across four asset classes. We will track these stats every quarter, so please get in touch if something doesn’t look right, or to suggest other ways to present the data: michael.paterakis@infopro-digital.com