36 South Investment Managers Limited, a 'tail risk' hedge fund manager, is preparing to launch the 36 South Black Swan Fund in August. The product is designed to provide protection for institutional fund portfolios in significant risk aversion periods.

The fund will be built using a proprietary asset allocation process based on the 36 South Global Implied Volatility Indices and will hold only 'bought' option positions around five years in maturity. It will be a composite diversified portfolio with a long volatility exposure to a mix of equities, interest rates, currencies and commodities.

Jerry Haworth, chief investment officer of 36 South, says: 'Historically in risk aversion periods, as correlation coefficients tend to 1, pan-asset class implied volatility tends to move sharply higher in concert. So we won't just look to have an equity puts exposure but will also look to find the cheapest risk aversion protection proxies, whether they may be in currencies, interest rates or commodities.'

According to 36 South, the new fund is designed for investors with longer investment time horizons, with a tiny cash component and almost fully invested in options. 'The 36 South Black Swan Fund will operationally feel much like a managed account to an institutional investor,' the firm says. 'But unlike a managed account, it will have all the advantages of a simple fund investment. It is likely to be available to investors through a well-known hedge fund platform, making due diligence easier.'

The fund is designed to be approximately 2.5 per cent of an institutional portfolio, giving an overall institutional portfolio theta 'bleed' of roughly 50 basis points per annum but contributing a pay-off to the institutional portfolio of between 10 and 15 per cent in times of global market stress.

Haworth added: 'It is clear that there is strong demand for a product that provides more than just basic 'medical' aid for portfolios. We believe this product is the portfolio equivalent of hospital insurance.'


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