AXA Investment Managers has launched its first open-ended dynamic asset allocation product for the U.K. market and has used over-the-counter derivatives to hedge the gap risk. Vincent de Martel, director in structured products and alternative investment management in London, said the reason it has not issued such a deal before is it is hard to hedge so-called gap risk, the risk that the underlying investments will fall through certain thresholds without AXA having time to redistribute assets.
The asset manager hedges the gap risk with over-the-counter derivatives, effectively buying a series of knock-in puts.
In these products, investors receive upside participation in the FTSE 100 and either 70% or 80% capital protection. CPPI usually provides 100% capital protection, but because this fund is open-ended and must therefore be allocated on a daily basis only 70-80% capital protection can be offered. If the markets rally, however, the level of protection increases.
