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Gilt fund uses derivatives

Close Finsbury Asset Management has created a gilt fund that uses derivatives to enhance returns. The UK gilt fund is an offshore Oeic that will draw on the skills of fixed-interest specialist Charteris Treasury Portfolio Managers. Charteris was appointed manager of the fund because its investment philosophy is based around risk management. When selecting gilts, Charteris will use Giltsoft, an analytical tool it has devised to look at yield curves.

Yield curves indicate the relationship between yields and maturity dates for different types of gilts. After inputting expected changes in interest rates and other factors, Giltsoft illustrates what the yield curve is likely to be, showing which gilts are likely to produce the best returns. These returns can be further enhanced by the use of covered call options which are written against the holdings in the portfolio.

Charteris gives buyers the chance to buy gilts at a certain price at some point in the future for a premium. If the actual gilt price is lower at that point, the fund will make gains but, if the price is higher, this favours the buyer. However, in a covered call option, Charteris – as the owner of the gilts – can cancel the option to protect its position.

Gilt prices are affected by interest rates so, when rates are high, gilt yields tend to be low. The recent rise in interest rates, with the possibility of further increases, makes it unlikely that gilt prices will rise dramatically, so the use of derivatives may be a useful strategy of overcoming this without dramatically increasing risk.

However, understanding how derivatives work may be too complicated for most people. This may make the fund more suitable for sophisticated investors.


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