1998 Survey of Derivatives and Risk Management Practices by U.S. Institutional Investors

This paper presents the results of a survey of U.S. institutional investors regarding their use of derivative securities and risk management practices. The survey focuses on three categories of institutional investors - pension plan sponsors, college and university endowments, and private foundations. Among many findings, we report that 46% of institutions permit their asset managers to use derivatives. The fraction permitting the use or derivatives ranges from 63% for pension plan sponsors, to 38% among college and university endowments and to 28% for private foundations. Of those institutions that permit derivatives use, only 59% reported open derivatives positions as of year-end 1997. Thus, only 27% of all respondents to the survey reported outstanding derivatives positions. However, other evidence suggests, that this is a conservative estimate of derivatives positions. Where derivatives are used, the positions tend to be small relative to total assets. The modal notional value of derivatives as a percent of assets is 1.0%, while the median value is 5.0%. Risk governance surrounding derivatives at institutional investors appears to be less intensive than at banks and securities dealers. However, the large majority of institutions (80%) place some limitations on the nature or extent of derivatives activity among internal or external managers.