Lyxor launches all-weather H-share product

The capital-guaranteed fund provides returns linked to the volatility of Hong Kong's H-share index.
Investors in Hong Kong's H-share index have been on a wild ride during the past year, but a new product from Societe Generale's asset management arm aims to provide a cure.

In the worst case, the two-year Lyxor All-Weather Guaranteed Fund will return investorsÆ capital plus a 1.5% coupon, but if the market continues to swing wildly they stand to earn a bigger profit thanks to a feature that generates positive returns in either bull or bear markets.

Continued volatility should be a safe bet according to Lyxor, which says that uncertainties about oil prices and interest rates, as well as geopolitical and economic factors, have contributed to a period of adjustment for China's equity market.

Indeed, the Hang Seng China Enterprise Index, better known as the H-share index, has been one of the most volatile in the world during the past year, recording a 90-day historical price volatility of 41% between August 1, 2007 and July 31, 2008. That is considerably more volatile than any of the main benchmarks in Asia û only Mumbai's Sensex comes close, with a volatility of 37.3%.

The new fund helps investors to profit from this instability by turning negative returns into a positive number. Using this trick, the return is calculated each month, subject to a cap that is expected to be 17%, but could be anywhere between 15% and 19%.

According to Lyxor, the index has had an average positive quarterly return of 16.6% since 1994 and an average negative return of 15.4%, which translates to an average 16% return for the purposes of the All-Weather fund. During the fund's two-year lifetime, a 16% quarterly return would provide a very attractive total return of 28%.

However, starting on August 1, 2006, this strategy would have generated an average quarterly return of 13.2%, which means that investors would have earned 5.6% during the fund's two-year lifetime.
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