Hedge funds investing in emerging markets are the latest hot sector for fund-linked structurers. Emerging-market funds are attractive to investors, explained one London-based structurer, because of the potential for high returns. The volatility levels, however, can dissuade investors from investing directly in the funds, so they are looking at capital-protected notes that reference the funds via options or constant proportion portfolio insurance.
The Credit Suisse/Tremont Hedge Fund Index emerging market sector has a year-to-date yield of 10.2% compared with the broader index at 7.64%. Hedge fund firms such as BlueBay Asset Management that run emerging-market funds have been looking at offering capital-protected versions globally (DW, 9/15), but the volatility of these funds can make it expensive to write capital protection.
ABN AMRO in Europe has reportedly just offered a capital-protected note linked to an in-house emerging-market fund. It is likely the structurers were given good liquidity and some indication of the fund's positions, to lower the cost of protecting the fund. Officials at the Dutch house declined comment.