The queue for equity protection is out of the door. Or is it?

For those that work in London, the lunchtime sandwich rush will be all too familiar. The best places are always queuing out of the door, wasting valuable minutes of a lunch “break” – this can put many people off.

The other day we were out picking up our lunch just before 12 – we were in and out with our food within 5 minutes, leaving at 1201. At the time we were leaving the queue was out of the door.

This made me realise that many people may not have a choice over the time they have lunch and so are forced to queue. So long as we are happy to eat lunch at a “non-standard” time we can use that to our advantage and manage the time we waste in queues.

Are there any equivalent advantages that pension schemes have?

The age old advantage is one of being a “long term” investor. But what does that actually mean?

For me that means the ability to take a longer term view on asset prices and not be distracted by short-term fluctuations.

This, perhaps unexpectedly, gives pension schemes a competitive advantage in equity derivatives.

One of the uses of equity derivatives is to provide protection from equity market falls. The price of that protection reflects the needs of the investors looking to buy protection. For most players in equity derivatives they can be forced to buy protection from markets falling to zero (or near zero). This means the cost of protecting markets falling to zero is expensive (the market jargon for this is “skew”).

Pension schemes are certainly worried about modest falls, but, as long term investors, how worried are you about markets falling to zero? Most schemes do not have this worry and so don’t need “full” protection.

In fact, in stressed markets in the past, when everyone else is scrambling for full protection, only paying for protection that you are worried about has not only been value for money but also a significant advantage.

So next time someone tells you protection from equity market falls is expensive, take a step back and think about what protection is important for you – it may well turn out that it puts you at a distinct advantage to those queuing up.


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