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Old Mutual seeks to prosper

Old Mutual Prosper 80 from Old Mutual Asset Managers is a capital-protected product linked to the performance of a manager of managers hedge fund portfolio and cash using a form of constant proportion portfolio insurance (CPPI).

This product aims for returns of 4 per cent above the Bank of England base rate and is intended to have lower volatility than equities with a similar risk to corporate bond funds. The underlying hedge fund portfolio consists of segregated accounts run by different managers using various strategies to trade a range of asset classes.

Using a method of CPPI, the underlying portfolio can be move between cash and the hedge fund portfolio in line with market conditions. But according to OMAM, a hedge fund portfolio is more likely to produce positive returns in difficult conditions compared with traditional asset classes, so it is possible to maintain a higher exposure to the underlying growth assets and keep cash to a minimum. The capital protection on offer works by locking in 80 per cent of the highest ever price rather than returning the original capital to investors.

The open-ended structure with daily dealing and daily pricing, combined with a manager of managers approach was designed to offer transparency to investors while giving Old Mutual greater liquidity and control. In contrast to funds of hedge funds, holding segregated accounts managed in-house and by external managers allows Old Mutual to look at the underlying holdings in real time, not just information on the top 10 holdings at a time lag.

Although capital protection should not be needed if a diversified hedge fund portfolio performs in all market conditions as it should, it may give some investors peace of mind. However, research from Standard & Poors into the fund of hedge fund market suggests that not all hedge funds are entirely independent of market conditions. While this may not be the case for Old Mutuals underlying portfolio, factors such as historically low interest rates and trendless markets could still provide a challenging environment.

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