In markets where every basis point counts, swaps can make — or break — a hedge fund’s strategy.
As hedge funds navigate unpredictable interest rates, regulatory shifts and evolving market structures, swaps have become an indispensable and sophisticated tool in investment strategies.
Equity swaps, in particular, are a cornerstone for many hedge funds, providing exposure to equity performance without the need to own the underlying securities. This flexibility allows funds to implement hedging, financing, and long/short strategies effectively.
However, while swaps offer powerful risk-management advantages, they also introduce complex workflows that can be challenging to reconcile with firms’ listed equity holdings.
And without the right approach, funds risk falling behind in execution and performance.
In this post, we explore the trends driving the growth of swaps and examine how technology enables alternative managers to unlock the full potential of this complex instrument while navigating unpredictable markets.
A Time of Growth: Swaps as Part of a Hedge Fund’s Diversification Strategy
Equity swaps have seen strong growth over the past decade.
The International Swaps and Derivatives Association (ISDA) reports that the outstanding notional value of equity derivatives, including swaps, grew to $8.7 trillion as of the end of June 2024—an increase of 10 percent compared to the same period the year prior.
The ISDA notes that this expansion is fueled by increasing globalization and hedge funds’ demand for more flexible, diversified strategies.
Alternative managers are turning to equity swaps not only for their versatility but for the range of strategic advantages they provide:
Enhanced Market Access Gives Hedge Funds a Strategic Advantage
Because swaps allow access to restricted or illiquid investments, alternative managers increasingly use them to gain a strategic advantage.
By leveraging equity swaps, managers can access assets like specific indices, emerging market securities, exotic currencies, or commodities that are difficult or costly to trade directly due to regulatory, liquidity, or ownership constraints.
By enabling the implementation of niche or highly targeted strategies that might not be feasible through traditional trading, swaps have the potential to expand a hedge fund’s opportunity set and enhance portfolio flexibility.
Capital Efficiency in Hedge Funds’ Investment Strategies
Because they typically require only margin or collateral, swaps allow managers to gain exposure to a wide range of assets, indices, and markets without fully deploying capital upfront.
This capital efficiency allows firms to pursue multiple strategies simultaneously, diversify more broadly, and respond dynamically to changing market conditions.
When combined with enhanced market access, these benefits provide hedge fund managers with the flexibility and opportunities needed to construct more resilient portfolios and pursue potential alpha.
Optimized Cost, Tax, and Regulatory Efficiency
Swaps enable hedge fund managers to manage costs and regulatory obligations more efficiently. By providing exposure without direct ownership, swaps can reduce transaction costs such as brokerage fees, exchange charges, and stamp duties.
They can also offer tax advantages. For instance, dividends received through a swap may be more tax-efficient than direct ownership, and in some jurisdictions, swaps allow deferral of capital gains taxes.
Additionally, swaps are often treated differently under accounting and regulatory rules. This off-balance-sheet treatment can lower capital and reporting requirements, giving managers greater flexibility in structuring their portfolios.
By combining cost efficiency, tax benefits and regulatory flexibility, swaps provide a practical way for managers to optimize portfolio performance while navigating complex markets.
Manage and Mitigate Risk Through Hedging
Swaps are a powerful tool for managing and mitigating risk.
They allow managers to hedge exposures—such as interest rate, currency, or equity risk—without needing to sell the underlying assets. This enables managers to preserve existing positions while protecting against potential negative returns.
Hedging with swaps can be both precise and cost-effective. Managers have the flexibility to target specific risks and stabilize portfolio performance. By managing downside risk in this way, swaps help funds maintain more consistent returns while navigating a turbulent market.
Leveraging Technology to Unlock Swaps’ Full Potential for Your Hedge Fund
Swaps offer hedge funds a compelling way to navigate unpredictable interest rates, evolving regulations, and rapidly changing market conditions.
But capturing these opportunities—and turning them into a competitive advantage—requires managing swaps with precision and efficiency.
The right technology is essential.
Hedge funds need investment systems that can automate complex workflows, deliver real-time transparency, and seamlessly handle the intricacies of these sophisticated instruments.
When evaluating solutions, look for technology with the following capabilities:
Streamlined Trading and Execution
Your investment technology should support electronic routing of swap orders, automatically associating trades with the correct contracts, and ensuring consistency across the investment lifecycle.
This seamless trade capture reduces operational friction and enhances execution efficiency.
Automated Lifecycle Management
Once a swap is configured, your technology should be able to track all key events—resets, payments, and accruals—automatically. This automation minimizes manual intervention, reduces error risk, and frees investment teams to focus on strategy rather than administration.
Real-Time Transparency and Reporting
Comprehensive, real-time analytics provide visibility into exposures, P&L, and cash flows. Detailed reporting capabilities help managers monitor positions with confidence and deliver transparency to investors and regulators alike.
Integrated Workflows Across Functions
An ideal platform unifies trading, operations, and accounting in one system—eliminating fragmented processes and the “swivel chair” effect of switching between multiple tools. This integration enhances accuracy, collaboration, and control.
Scalable, Risk-Reducing Infrastructure
The right technology not only simplifies complexity but also scales with growth. By reducing manual processes and maintaining auditable data, it helps firms mitigate operational risk while supporting evolving investment strategies of today and into the future.
Managed Services that Extend Your Team
To ensure your firm has the resources needed to manage swaps effectively, look for a technology provider that offers managed services to support front-, middle-, and back-office operations.
These services should operate as an extension of your team, handling essential, routine processes directly within your technology platform.
By offloading operational tasks, you can conserve internal resources and focus on the higher-value work that drives performance and makes your swaps strategy successful.
Eclipse: The Technology Hedge Funds Need to Manage Today’s Swap Opportunities
SS&C has a long history of developing technology to support hedge funds’ needs. Our Eclipse technology is a truly cloud-native, high-performance solution that frees you from system maintenance and integration headaches so you can focus on executing your strategies, including swaps.
As part of our ongoing development of Eclipse, we've recently added new features to help users better navigate the complexities and demands of swap management. Watch this video to learn more.
To learn more about choosing technology that is right for your hedge fund, download our Hedge Fund Technology Buyer’s Guide. Whether you are managing swaps or other complex investment strategies, contact us to learn how SS&C technology can be a resource for your firm.
