product launch | capital protected note will invest primarily in emerging managers in various strategies
Hedge fund specialists Fortune Asset Management have teamed up with Deutsche Bank to offer a capital protected note investing primarily in emerging hedge fund managers.
The seven-year Xavex Fortune Note will be open for investment until the end of December 2003 and start investing in January next year.
Four-fifths of the fund will be invested in five emerging managers selected by Fortune; the rest will go into Fortune's already established Market Wizards fund in order to provide a level of stability to the portfolio. The targeted returns are 8-10% over cash.
The product features a minimum investment of $50,000 or the equivalent in euros, sterling and potentially any other currency, if there is demand. The product is aimed at retail investors, with a focus on intermediaries, who can claim up to 4% initial commission and a 0.5% trail fee. These fees are incorporated into Deutsche Bank's charges and so will not directly impact performance.
Early redemption is possible on a monthly basis, but the penalty will be at least the underlying charges. However, there is expected to be an over-the-counter market in the notes, which could provide a more cost-effective get-out route.
The note will start with a 100% exposure to the portfolio of emerging managers and the Market Wizards fund, increasing up to 150% with leverage, which Deutsche provides at Libor. Leverage will only be used if the performance has been good enough to protect the initial capital and decreasing to 0% if the capital protection strategy has to kick in.
Deutsche will provide this capital protection by shifting an increasing proportion of the assets into zero coupon bonds if the underlying funds' performance worsens. If the underlying assets hit a set floor, then the whole product will be locked into zero coupon bonds until maturity. This trigger level will start at around a fall of 20%-30%, increasing as the product gets closer to maturity.
Simon Hopkins, managing director of Fortune, estimates that the emerging managers portfolio will eventually expand to incorporate 15 managers. Hopkins pointed out that, unlike many competitor products, his company is actively choosing the managers that will go into the note. Other products are more structure-driven, with the sponsor choosing hedge fund managers from an available list. With this product, the reverse happens - after selection, the emerging managers are expected to be available via Deutsche's Xavex platform, as long as demand and liquidity are good enough.
A further advantage, according to Hopkins, is especially relevant to UK investors. The structure of the note means that the product is subject to capital gains tax, not income tax. Therefore UK investors can get taper relief. Taper relief peaks at 10 years and Fortune will specifically provide for this by allowing investors to stay in the fund for a further three years after the nominal full term of seven.
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