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Vincent D's List: Dividend swaps and dividend linked investments
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istorically, over-the-counter dividend swaps were created to transfer risk from banks to hedge funds. Generally speaking, any equity derivative, vanilla or exotic, includes a dividend element. As issuers of structured products became, in effect, long forwards, they were willing to transfer the dividend risk, even at a steep discount. Facing them were hedge funds, more than willing to take advantage of such deep discounts. This dynamic was the main driver of the dividend market from its inception in the early 2000s, up to a year ago.
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Dividends increasingly appear as an underlying in their own right, enabling investors to express views on companies, with a focus on the underlying profitability and actual returns to investors.
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At present, the dividend futures market for the Eurostoxx 50 is implying a 10% drop in dividends over the next 10 years, which Bance believes is too bearish.
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