MAM Funds’ Midas balanced growth fund has recently used a long volatility exchange traded fund as an alternative to a short Eurostoxx ETF.
Fund manager Simon Callow says he wanted to partially short UK and US exposure because of concerns about equity markets.
Callow says the CitiGroup US Economic Surprise index, which he views as a good lead indicator of equity markets, had been rising over the past nine months but started to fall about five weeks ago amid concerns that US companies were likely to miss earnings targets.
The elections in Greece were another cause for concern in relation to equity markets.
These economic conditions prompted the team to short the FTSE 100 and S&P 500 indices using Deutsche Bank’s db X-trackers short ETFs. The team also wanted to short European exposure but did not want another short position ETF from the db X-trackers range, as it did not want too much counter- party risk from Deutsche Bank.
Instead, the team decided to invest in a long European volatility ETF. Volatility spikes up when equity markets fall, meaning a long volatility ETF produces the same effect as a short Eurostoxx ETF.
The team chose to implement the long European volatility trade through the ETF Securities/Bank of America Merrill Lynch IVStoxx ETF. This position has now been sold, enabling the Midas team to lock in a 20 per cent profit.
The Midas team has also added the Jupiter Japan income fund to its portfolio.