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UBS explores plus points with bond fund

UBS Global Asset Management has launched a bond fund that can take synthetic long and short positions using derivatives under Ucits III.

The UBS Corporate Bond UK Plus fund is managed by Nick Barnes who heads up the UBS UK fixed-income team. The fund aims to provide a return above that of UK investment-grade corporate bonds. Although UK corporate bonds will form the core of the portfolio, the fund will have a small weighting in overseas bonds. It is benchmarked against the iBoxx Non-Gilt index.

The fund was launched in March, raising £67m mainly from institutional investors, but UBS is just starting to market it to retail investors. As well as corporate bonds, government bonds and other securities, the fund will able to use derivates such as swaps and futures for investment purposes.

The greater investment flexibility Ucits III allows bond fund managers to navigate difficult markets and boost returns by shorting techniques using derivatives. This means the fund manager has the potential to generate positive returns, even where markets are weak.

However, the use of derivatives carries specific risks. For example, swap markets may be less liquid at times that bond markets, which means the fund manager may need to sell direct bond holdings he likes to create sufficient liquidity.
More fund management groups are starting to use the wider investment powers of Ucits III and while institutional investors may be comfortable with the techniques used, it could take a while for retail investors to follow.

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