In the study "Leverage certificates and warrants: Trading Motives and Performance" ["Hebelzertifikate und Optionsscheine: Handelsmotive und Performance"], which was conducted by Professor Dr. Lutz Johanning, Chair of Empirical Capital Market Research at WHU - Otto Beisheim School of Management, among others, and which examines the use of structured financial products by private investors, the authors show that 68.6 percent of investors use leveraged products to hedge existing portfolios or intended investments. Only about one-third of investors choose these instruments to exploit expectations about the price development of the underlying assets.
"Derivatives serve an important purpose on the financial markets: they enable investors to hedge against price change risks," says Professor Dr. Lutz Johanning. "Against the background of the study results, it is clear that there is no reason for regulatory product interventions, for instance, a restriction or even a ban on the distribution or sale of leverage certificates and warrants - especially since these investor groups know exactly what they are doing.
The investors examined were divided into three categories according to their trading motives: The so-called hedgers (around 24.4 percent of the private investors surveyed), who avoid high losses and use leveraged products and warrants as insurance instruments; the strategic hedgers (44.2 percent), who use products more as a longer-term investment, profit from the leverage of the products and hedge against financial risk, and the speculators (31.4 percent), who try to profit from short-term market movements.
In contrast, suitable product information geared to the various trading motives could contribute to an even better understanding of the products. The results also need to be taken into account in tax legislation: "The new tax treatment of total losses on forward transactions would considerably restrict or even destroy the use of these instruments to hedge existing portfolios and for strategic hedging," Johanning continued.
The study is based on a representative data set of German private investors from a major German online broker. Transaction data of almost 70,000 investors were considered, of which 22,077 traded leveraged products at least once between 2000 and 2015. The study was conducted in cooperation with Professor Dr. Lutz Johanning, WHU - Otto Beisheim School of Management, Dr. Steffen Meyer, University of Southern Denmark & Danish Finance Institute and Kim Bövers, PhD student at Leibnitz University of Hanover.