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Positive fund from BlackRock

BlackRock’s European absolute alpha fund aims to provide positive returns
across all market conditions by investing in a portfolio of European
equities and equity-related securities, including derivatives.

The fund launched following six months of stress testing. A dummy portfolio
during that period delivered a 7.9 per cent net gain, compared to a fall of
over 35 per cent from the MSCI Europe index. BlackRock says this illustrates
the performance potential of the fund, but it will not be managed to any
benchmark index.

The investment strategy is made up of four areas – long investing,
synthetic-short investing using derivatives, pair trades and cash. Short
investing is where fund managers make a profit by borrowing shares, selling
them and buying them back when the price has fallen. This fund cannot short
stocks directly, but the same effect can be achieved using derivatives. This
is known as synthetic shorting.

Pair trades refers to a long and a synthetic-short position taken in two
stocks in the same sector. To profit, the manager only needs the long
position to outperform the short position, regardless of the direction of
the market. Fund manager Vincent Devlin can also invest 100 per cent in
cash.

Using derivatives for shorting enables the fund to benefit from leverage,
giving the fund exposure to a portfolio of shares that is bigger than the
value of its net assets. Devlin can increase this fund’s gross market
exposure to 150 per cent of its net asset value, but is not expected to do
so in normal circumstances. Leverage is useful to increase profits if the
fund manager is successful, but the drawback is it can amplify losses if he
is not.

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