Invesco is launching Hong Kong's first guaranteed fund linked to a locally authorized hedge fund. The Invesco 360º Strategic Guaranteed Segregated Portfolio will track the performance of an index linked to Invesco's Absolute Return Master Fund. The fund has a maturity of 47 months.
The fund guarantees the highest of three returns at maturity. The first is 100% of the principal, the second is the net asset value of the 360º fund and the third is 80% of the highest NAV that the 360º fund achieves between issue and maturity. While this fund is new and so has no track record, Invesco says similar strategies it manages have returned double digits annualised returns over the past 10 years.
The underlying master fund will integrate a bottom-up, long-short US equity neutral strategy with a top-down financial futures strategy investing in S&P 500 index futures and US government bond futures. Invesco's structured products group, based in New York, will manage the master fund.
The guarantee itself is somewhat different from the approach taken by many on offer in the retail market. Barclays Capital will issue a structured note which the 360º fund will own. At maturity it will be redeemed for 100%. The note will reflect an index linked to the underlying fund and to a zero coupon bond.
Barclays will also, through a deed of guarantee with the fund, commit to provide for the protection of the investors' principle. "We have chosen a dynamic approach to principal protection," says Brett Bastin, head of product development for absolute return strategies in London. "It allows for the possibility that the allocation to the underlying Invesco Absolute Return Master Fund could be increased over time to produce more attractive returns. It could also, under certain circumstances, be reduced."
Barclays Capital can change the allocation to the underlying fund on a weekly basis. At launch Barclays will allocate 30% of the principal into the underlying fund, the rest will be in a zero coupon bond. Over time this allocation could be raised to up to 150%.
However, if the fund, in Barclay's view, is not offering a better return, then the allocation can fall to zero. This means that the participation rate can vary from 0% to 150%, at the discretion of Barclays Capital.
The fund has no initial subscription fee and a 0.9% per annum management fee. There is a performance fee of 12% of the appreciation in the NAV of the underlying fund, above a high water mark. There is a redemption fee of 2.5% at issue falling over time to zero at maturity.
The fund will be offered to retail investors in late March for a period of six weeks through Invesco's distribution network of banks and independent financial advisors. Invesco is still in discussion with distributors. The minimum subscription amount is US$5,000. Invesco says the minimum they aim to raise is $20 million.
Invesco will target all types of investors, especially those that want exposure to hedge funds but lack confidence to do so directly due to lack of familiarity.
If the fund is successful in Hong Kong the same model could be used in other markets says Invesco. Indeed, Bastin was in Singapore before arriving in Hong Kong. "We are a true believer in the absolute return concept," he says, "and would like to introduce it to new markets as opportunities arise. In Hong Kong, because the concept is rather new to retail investors, we build the element into a guaranteed fund via Invesco Absolute Return Master Fund. Our intention is to continue to use Invesco Absolute Return Master Fund as the building block for future initiatives elsewhere."