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Merrill takes long with the short

Merril Lynch Investment Managers has introduced the UK absolute alpha fund a unit trust that takes full advantage of the Ucits III regulations.

The fund aims to achieve positive returns in rising and falling markets by taking long and short positions in UK equities and derivatives.

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, the Ucits III regulations do not allow unit trusts to physically short sell stocks as hedge funds can, so synthetic short positions are created by shorting derivatives.

The Merrill Lynch fund will take short positions by investing in contracts for difference. These are derivatives which are not currently liable for stamp duty. Pair trades, where long and short positions are taken within the same sector, will also be used to ensure there is a potential to profit even if the sector performs badly.

The fund is managed by Mark Lyttleton, who joined Merrill Lynch as a graduate in 1992 and has over 10 years experience of UK equities. He currently manages the Merrill Lynch UK dynamic fund and the Merrill Lynch UK fund.

Merrill Lynchs approach is different to long only funds where managers can only avoid the stocks they think will fall in price and are not able to turn them into money-making opportunities. However, the fund is not Isa eligible and it may take time for investors to feel comfortable with full Ucits III capability.

According to Standard & Poors, Merrill Lynch UK dynamic is ranked 22nd and Merrill Lynch UK is ranked 43rd out of 258 funds in the IMA UK All Companies sector based on 1,000 invested on a bid-to-bid basis with net income reinvested over three years to May 9, 2005.

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