Kleinwort Benson, the private bank, has launched two new funds which offer returns on equity volatility, using a formula-based strategy whic...

Kleinwort Benson, the private bank, has launched two new funds which offer returns on equity volatility, using a formula-based strategy which the bank has tested over the past 16 years. Andy Halford, head of structured products at Kleinwort Benson, told WealthBriefing: "The strategy takes advantage of two types of volatility. Actual volatility is the amount underlying markets move, while implied volatility is driven by option prices in the market. Because most users of option prices are buyers rather than sellers, market makers tend to price applied volatility above where they think actual volatility comes in." The DEVA 80 & 90 Alpha funds come in a sterling denominated Open Ended Investment Companies wrapper, and are designed to target absolute returns of 9 per cent per annum and 4 per cent per annum above the Bank of England base rate. An algorithmic strategy is adopted to take advantage of the difference between implied volatility and realised volatility in the US equity market using the S&P 500 Index. Mr Halford added: "The DEVA 80 doubles up exposure to the strategy so it promises higher returns. Capital protection increases as the fund size increases which is also unusual. Some hedge funds do similar things based on volatility but they tend to be dynamically managed. This relies simply on an Excel spreadsheet."