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Isle of plenty

Axa Isle of Man has teamed up with Liberty Ermitage to offer an offshore unit-linked bond that invests in a fund of hedge funds.

The defensive bond invests in the Liberty Ermitage asset selection fund which is a global multi-manager portfolio of 22 hedge funds. The fund can be geared by up to 10 per cent and aims for low volatility with low correlation to equities.

The hedge funds that are considered will use a range of market-neutral arbitrage strategies, including merger arbitrage, which exploits the difference between current share prices and the potential value after a takeover. Funds that use other strategies, such as long and short equity and distressed securities, will be considered.

The bond aims to make it possible for retail investors to use the benefits of hedge funds during a period of uncertainty within equity markets. The Liberty Ermitage fund was chosen because it has the resources to monitor 4,000 hedge funds. Its analysts visit hedge fund managers and look out for new talent.

Like many hedge fund products, this bond is likely to appeal only to sophisticated high-net-worth clients and institutional investors such as pension funds rather than the mass market.

Its diversity across region, fund manager and hedge fund strategies positions this at the lower-risk end for hedge fund products. But there are offshore bonds, such as Man AP strategic series 2, which lower the risk of hedge funds further by offering a capital guarantee.

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