The Man Group has launched a capital guaranteed product that uses a leveraged constant proportion portfolio insurance (CPPI) structure. This enables the fund to leverage itself to purchase zero coupon bonds with borrowed money when it is first launched, which allows more of the capital to be invested in the underlying assets, explained Gilbert Dunlop, head of product engineering in London. The advantage of this is that it prevents the fund from having to move its assets into cash securities as quickly as a traditional CPPI structure if there is a steep decline in the underlying.
In addition, the maturity of the product, which is 12 years for the dollar fund and 121Ž2 years for the euro-denominated fund, gives the product a higher degearing point. The fact that the guarantee is provided by WestLB and is separate from the actively-managed portion also raises the tolerance of the structure to a fall in the underlying, according to Dunlop.
To provide collateral for the guarantee, Man Group will purchase zero coupon bonds--short term Treasurys in the U.S. and cash deposits in Europe. The fund manager will then short treasury futures to hedge interest rates. Additionally, in its euro series it will enter foreign exchange forwards to hedge fx risk since its investments are denominated in dollars.
The Man Group uses leverage in this structure so that only 60% of the total capital is put toward collateral for the capital guarantee, Dunlop noted.
The remaining 40% of investors' cash is invested in the group's hedge fund portfolio, which includes managed futures, long/short equity and arbitrage. Dunlop noted that the fund features a profit lock-in feature, meaning that if the strategies deliver a return some of it will be used to purchase additional zero-coupon bonds and raise the guarantee. The fund targets a 14-16% return.
