Macro hedge funds are increasingly turning to so-called “light exotic” options to express relative value views, with demand for index-versus-index structures climbing as correlations shift across global markets, according to a report by Bloomberg.
These strategies allow funds to take directional exposure on the spread between two benchmarks – such as the S&P 500 versus the Nasdaq 100, or Euro Stoxx 50 versus CAC 40 – without taking on outright index risk. In some cases, cross-asset dual digital options are being deployed, offering the ability to bet on one market rising while another falls, for example the S&P 500 against euro-dollar rates.
The structures have gained traction this year as managers rotated between sectors and geographies. Bank of America’s Raphael Cyna said volumes in outperformance options rose sharply after April, when a spike in correlations pushed investors to look beyond intra-US spreads and towards cross-regional relative value opportunities.
Funds are also using outperformance calls as hedges against factor risk. Earlier in the year, some banks facilitated trades where investors sold calls on custom long-short momentum baskets, a strategy that paid off during January’s sharp unwind of high-momentum stocks following DeepSeek’s AI breakthrough.
While premiums for these trades can be expensive given low implied correlations, hedge funds are finding ways to reduce costs. Conditional payoffs — for example, a Euro Stoxx 50 over S&P 500 call that only pays if the US index is higher at maturity — can cut costs by more than half. One-month maturities are also being used to cheapen exposure further.
Political risk in Europe is adding to demand. French government instability has widened OAT-Bund spreads, while JPMorgan strategists are recommending trades positioning for European equity outperformance into year-end. One structure highlighted is an OTC option expiring in December, with a breakeven at 3.7% Euro Stoxx 50 outperformance over the S&P 500.
