Portfolio will aim to hold 50-70 stocks from universe of 300 companies
ADM Investor Services International has established a Dublin-listed Ucits fund that writes options over indices and stocks.
The fund complements its existing private client service, managed by Theta Enhanced Asset Management Limited, which performs the same function, segregating accounts around high net worth client portfolios.
The new vehicle, called Orchard Funds Limited, aims to hold 50-70 stocks, or options on them, out of the 300 companies it monitors.
It is currently using mostly index options as the risks associated with individual equities are disproportionate to returns, according to the manager Richard Harwood.
While Theta's private client service takes subscriptions of at least £2m, the Dublin-domiciled fund will accept investments of £50,000 or E80,000, with share classes in both currencies.
Harwood, Theta's chief investment officer, whose personal pension is invested in the program, said the fund may underperform a 'raging bull market' but is designed to outperform neutral and mild bull markets and make positive returns, however small, in mild bear markets.
He added: 'The fund is built with the mentality of slow growth, lower volatility and transparency.'
The fund will not write naked call options, whereby it does not own the underlying stocks, and will not write put options without holding the requisite cash to buy the shares if required to do so.
'This is not a geared investment so puts will only be written when there is cash to support it and calls can only be written when it has the stocks,' Harwood said.
'I do not believe in any given quarter this will be in the top 10% of funds but it should remain in the top half and, for the majority of the time, be in the top quartile.
'We can completely disinvest from any sector but we cannot go more than 15% above the sector weighting determined by the monthly macro investment committee.'
Using a mixture of fundamental, technical and relative value analysis, the managers set target prices at which they are willing to buy or sell shares, via options and indices.
Harwood said: 'GlaxoSmithKline, for example, is currently trading at 1168p.
'If we analyse the company and decide we are strongly bullish, we may buy the stock outright and decide on a price at which we would be happy to sell it over the next few months.
'If that price is 1400p, we write a 1400p call option and take in the premium from the option's buyer.
'By taking in the premium, we are turning that stock from a modest dividend yield into a yield that is much more comfortable.'
The fund will target 10%-12% annualised returns but Harwood emphasised this is not set in stone. It will use mainly large-cap stocks to achieve returns for reasons of management expertise and liquidity.
The portfolio will hold physical shares, call options on them and put options, but Harwood envisions a relatively low 25% annual turnover.
The fund will have a 1.5% management charge and annual performance fee of 20%, with a 10% hurdle.
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