ProFunds, a mutual fund manager with some USD2 billion under management, is today launching a group of index funds that will use over-the-counter equity derivatives. The funds are expected to bring in USD2 billion in the next six months, said Michael Sapir, chairman and ceo at ProFund Advisors in Bethesda, Md.
Among the funds launching today are a leveraged Standard & Poor's 500 index fund, a fund that is short the S&P 500 index, a Nasdaq 100 index fund, and eight Dow Jones sector index funds on sectors including utilities, health care, real estate, technology, and telecom. The funds are entitled to use OTC equity swaps and options for leverage and to gain synthetic exposure.
The new funds are expected to grow at a healthy clip, thanks to a distribution arrangement with American Skandia Life Assurance Corp. The financial services company will offer the funds to its variable annuities and variable life clients, who in aggregate have some USD30 billion to invest. ProFunds currently offers similar funds to its own investor base.
ProFunds is launching the funds now to offer investors diverse vehicles to take positions in the equity markets, Sapir said, noting that while the Nasdaq Stock Market and S&P 500 turned in negative performances last year, some sectors, such as utilities, performed well. Investors believing the S&P will rise only slightly this year can invest in the leveraged index fund, while those fearing a fall can invest in the short fund.
The funds are not actively managed. They use mathematical models to determine how to best gain exposure to their respective indices. One possible strategy a fund might use to gain exposure to an index is to buy an at-the-money call and sell an at-the money put, providing full exposure to the upside and downside, said Sapir. Factors such as cost and liquidity would determine if this strategy made sense versus, for example, going long the index in the cash markets.
