ABN AMRO in London is gearing up to launch an equity volatility fund for retail investors which will go to the Street on a regular basis to ensure it gets best market prices for its underlying assets. The fund is expected to be authorized shortly by the U.K. Financial Services Authority and when issued it will be one of the few vehicles offering equity volatility returns to retail investors.
Dresdner Kleinwort pipped rivals to the post earlier this year offering the first equity volatility fund authorized under UCITS III, a European retail funds regulation. Dubbed DEVA Alpha Fund, it plays the price difference between implied and realized volatility on equity indices (DW, 6/2).
The UCITS authorization process for complex funds of this type is lengthy and other firms have yet to issue such structures. ABN solved this problem, however, by hiring a pair of the Dresdner officials that masterminded the fund. Mike Egerton, institutional salesman and Jonathan Kent, head of investment products at Dresdner's private banking arm, joined ABN in September. Egerton declined immediate comment on ABN's launch ahead of FSA approval.
The planned fund has already generated buzz among investors, however, as it looks to go one better on the initial version launched by Dresdner. According to one potential distributor who has seen initial plans for the fund, it will be executed at a lower cost for investors. The design of both Dresdner's and ABN's funds requires variance swaps to be rolled regularly. Unlike the formula-driven German firm's fund, however, the ABN version will be more actively managed in that it will shop around for best market price each time it enters the swaps, thereby offering better returns to investors. The distributor noted that while this allows for an element of execution risk that doesn't exist in the Dresdner version, the returns are healthier.
