EUROPE - Dresdner is to launch two equity volatility funds aimed at pension funds and insurance companies next month.

In mid-September Dresdner Kleinwort, the investment banking arm of Dresdner Bank AG, will launch the DEVA 80 and 90 Alpha funds.
"We have interest from pension funds and insurance companies who are in need of low volatility type returns and are always seeking to diversify their core holdings to reduce the risk", Serge Desmedt, a managing director in the capital markets division of Dresdner Kleinwort, told IPE.

One of the main attractions of alternative asset classes like volatility is the lack of correlation to traditional asset classes.

"The intention here is to offer superior returns but also offering returns which will not suffer if other asset classes go down," Desmedt said.
The move comes as pension funds are becoming more interested in alternative asset classes - with investment banks seizing the opportunity to target this group of institutional investors directly.

The new funds exploit the difference between the implied volatility and the realised volatility in the US equity market using the S&P 500 Index.

Traders use so-called variance swaps traders to sell implied volatility and buy realised volatility at the beginning of a month.

At the end of each month the realised volatility is calculated, if the difference is positive it is paid out to the fund, Desmedt explains. The strategy is based on data collected over the last 16 years, which shows that implied volatility tends to be higher than realised volatility.

No returns are achieved if realised volatility is higher than implied volatility. Furthermore, performance of the funds might be adversely impacted by lower interest rates.