Fidelity Worldwide Investment says it is concerned about the lack of liquidity in the short-dated credit markets and is using derivatives to manage this risk in its own short-dated funds.
The company launched two short-duration funds last year, the Fidelity MoneyBuilder Income Reduced Duration fund and the Reduced Duration UK Corporate Bond fund, which since launch have amassed $140m (£86m) between them.
Fidelity head of UK retail sales Ben Waterhouse says the funds’ strategy of using derivatives to lower the interest rate risk better combats illiquidity in the funds.
The funds hold the same bonds as the standard funds with derivatives added over top to change the performance.
Waterhouse says: “We use the same bonds, but use a derivative overlay to bring down the duration from say five years to two years.”
He says the other option is to buy more mature bonds that will repay their capital soon.
He adds: “My concern about the short-dated credit markets is it is really small in an environment where fixed income is challenged.”
Chelsea Financial Services managing director Darius McDermott says: “The fact it has a specific product with manufactured duration is absolutely fine by us. Short duration is the place that many people want to be in given the concern over interest rates.”