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Directive changes direction

Abbey believes the management techniques of directional bond fund managers such as UBS will benefit multi-managers as long as risk profiles are not jeopardised.

UBS is among a handful of management groups using the Ucits III directive to run funds which can short currencies and bond markets through derivatives.

In Abbey’s view, strategies such as this are critical to the management of bond funds but fund managers have historically been restricted by regulation. Under Ucits III, fund managers can use bond futures to reduce sensitivity to interest rates within their portfolios. Arbitrage opportunities can also be created when an international company will have diff-erent bond prices in different countries.

Abbey head of client investment and multi-manager development John Kelly says: “The pace of change in bond markets is going to continue in an innovative way and it is necessary for legislation and fund managers to move forward. No value is added by the traditional approach so managers are starting to use derivatives to move exposure around and get currency exposure.

“But there is a caveat – these techniques can introduce things into a fund that investors do not want. Inappropriate techniques which increase risk to investors should not be introduced, even if they give you an excess return.”•Investment, p50

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