The wider investment powers of Ucits III are at the heart of this fund’s investment process. It has a different approach to many Ucits II funds, which use these powers as tools to dip in and out of when appropriate. This fund will aim to outperform the MSCI Europe index by 3 per cent with a maximum deviation from the index of 3 per cent.
European companies may be listed on more than one stock exchange at different valuations and may issue different types of shares, which have different prices. This type of situation throws up potential pricing anomalies that the Henderson fund can exploit, as will events such as takeovers and changes to equity indices.
Broadly speaking, the Henderson fund will look at related securities to determine which ones to hold and which to short. Conventional short selling involves borrowing a stock that looks likely to fall in price, selling it, and buying it back at a lower price to generate a profit. However, Ucits III funds are not allowed to physically short sell stocks the way hedge funds can, so ‘synthetic’ positions are created by shorting derivatives.
For example, pair trades – where long and short positions are taken within the same sector – can be used to ensure there is a potential to profit even if the sector performs badly.
The Henderson fund uses four strategies – relative value, liquidity, event driven and fundamental analysis – to uncover price anomalies. The manager will invest where the opportunities to go long and short are, regardless of whether the markets are likely to go up or down.
While this approach means the manager does not risk making the wrong asset allocation calls in terms of country and sector, the main risk would be shorting the wrong stocks, particularly if the manager has limited experience in derivatives.
However, Elms – who joined Henderson is 2002 – is an experienced hedge fund manager and traded in derivatives at his previous employers, Melbourne-based Portfolio Partners and County NatWest Investment Management.