covered warrants market will open on 14 October following their exemption from stamp duty
The UK covered warrants market is to launch on 14 October following the Inland Revenue's ruling that they will be exempt from stamp duty.
Covered warrants are secruitised derivatives that offer the investor the right, but not the obligation, to buy or sell an underlying asset at a set price within a specified period.
The warrants will be available on a broad range of blue-chip companies, sector baskets and both UK and overseas indices. Holders can buy calls and puts, enabling them to use the warrants as a way of hedging bets.
Unlike tracker funds and ETFs, covered warrants do not charge a management fee, so may be the cheapest route for investors that want exposure to an index.
As covered warrants are by nature leveraged, investors get exposure to a stock or index on a geared basis, at a fraction of the cost, although a premium does need to be paid for this access.
Brian Dennehy, managing director at Dennehy, Weller & Company, said one of the major attractions of covered warrants for intermediaries is in their use for risk averse clients.
For example, Sipp investors that want some equity exposure could get a three-year FTSE 100 warrant on a 10% premium, he said. This means if the market fell by 30%, all the investor would lose is the 10% they paid for the exposure.
Because of this, Dennehy said, covered warrants could be used as tracker fund-type vehicles without the downside risk.
'Why pay out £10,000 for an ETF when I can get the same exposure to an index through a covered warrant but for less risk,' he argued. 'Through covered warrants, an investor's exposure is limited. Only the premium paid is exposed, whereas, on pooled investments such as ETFs and tracker funds, investors are fully exposed to market falls.'
Unlike ETFs, warrants offer investors the ability to hedge market risk by going long and short through buying a call or buying a put, so the most an investor can lose is the premium they paid. ETFs by comparison are long-only instruments.
Covered warrants will not be eligible for Isas and Peps but can form part of a self-invested personal pension portfolio.
There will be six issuers of covered warrants at launch: TradingLab, Dresdner Bank AG, Commerzbank Securities, JP Morgan, Goldman Sachs and SociÃ©tÃ© GÃ©nÃ©rale.
Mark Valentine, executive director, equities division at Goldman Sachs, expects there to be around 500 warrants available to investors. Each of these will be branded by the issuer, he said, so the investor knows who they are dealing with ' a Goldman Sachs Vodafone warrant, for example.
Issuers expect most options to be for 12-36 month periods, considerably longer than traded options, which have up to nine months maturity.
To see how warrants are performing, Goldman Sachs will launch a website that demonstrate scenarios of what will happen to different warrants in different kinds of market.
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