F&C cash plus fund manager explains

Speaking at a conference this week Christopher Childs, manager of the F&C High Income Fund, introduced the concept that volatility should be considered as an alternative asset class in its own right.

Childs' fund was among the first UK retail funds to move away from a performance objective relative to a market index, to a cash plus objective. It has consistently managed to deliver its income target of 2% above UK base rates after charges for more than a decade. It has achieved this by investing in a combination of equities and fixed income with a derivatives overlay.

"We have employed a derivatives overlay strategy since we launched the fund in 1993 and it has since evolved with developments in the options and volatility markets," he said.

"The concept of volatility as a return generating asset class is undoubtedly fairly new to the IFA market place but one which offers investors a valuable source of alpha. Historically it can be demonstrated that positive returns are available by capturing the difference between implied market volatility, as indicated by the options market, and actual volatility. This is called "volatility trading" and is an integral element of the fund's overlay strategy. It is also employed in other funds managed by the F&C Alternative Investment Team including the hedge funds F&C Amethyst and F&C Sapphire," added Childs.

Childs used the example of a spread bet on a cricket match to explain how a variance swap works. "I explained the main difference between a spread bet on a cricket match and trading volatility is that whilst the former is typically a fair bet, the latter has exhibited a risk premium."