A new generation of equity volatility products that financial institutions are pitching to Swiss and German portfolio managers could meet an indifferent response in the U.K., according to a straw poll of fund managers conducted by DW. While Continental managers are apparently snapping up the deals, which include volatility certificates structured by UBS (DW, 3/8) and warrants on the VDAX structured by Merrill Lynch, their British counterparts have yet to be convinced of the benefits.
Merrill and UBS are marketing the structures to pension funds and hedge funds as a means of diversifying a portfolio and increasing efficiency, according to bankers at the two firms.
The mandate of most pension funds, however, is to beat an index--which includes volatility--and therefore hedging out volatility would actually deviate from a fund's mandate, argued Edward Catton, investment analyst at Liontrust Asset Management, which has GBP5 billion (USD9 billion) in assets under management.
Another concern of U.K. fund managers is the complexity of volatility as an asset class. "Volatility is a new asset class," said John Marion, equity structured products marketer at UBS in Zurich, "but someone has to be first." UBS is likely to market the products in the U.K, but has not yet set a time-frame for doing so, he added. Merrill Lynch plans to pitch warrants on the VDAX to U.K. fund managers in the coming weeks, an official familiar with the plan noted.
But not every U.K. fund manager will be eagerly awaiting the sales visit. "We know why they keep calling us about these products," said Tom Wills, a London-based derivatives specialist at Morley Fund Management, which has GBP111 billion in assets under management. Banks, he argued, may be looking to repackage their own volatility exposure into these structured products and offload them to fund managers.
Several groups are considering creating a European volatility index (DW, 3/8) which, if developed, would negate the need for complex volatility products, at least from the perspective of U.K. fund managers, saidAisling O Reilly, derivatives manager at Gartmore Investment Management, which has USD90 billion in assets under management.
