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DDQ in demand over derivatives strategy

The derivative-based strategy of Dawnay Day Quantum’s UK absolute income fund is attracting interest from multi-managers with multi-asset portfolios.

HSBC’s open global distribution fund and Miton Asset Management’s Iimia income fund are two funds of funds that contain the DDQ fund.

It aims to pay a quarterly income of 2 per cent above Libor, achieved partly through call options, while preserving capital through put options.

DDQ will generate income through dividends on the tracker element of the portfolio and enhance this by selling call options.

Call options give the manager the right but not the obligation to buy shares at a set price before the option expires. If the share price subsequently rises, the manager will profit from the difference between this and the price of the call option.

Put options allow managers to profit from the difference between the price of the option and the actual share price in a falling market. Buying a put option against a holding in the UK tracker element gives DDQ protection against a fall in the share price while allowing it to profit from a rise in the share price.

Chief executive Mark Mathias says: “It gives asset allocators a higher level of income than the average bond fund, unless they take an abnormal amount of credit risk, and low volatility.”

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