JP Morgan, Source roll out London-listed European-tilted volatility strategy ETF

Apr 2nd, 2012 | By | Category: Alternatives / Multi-Asset

JP Morgan and Source have announced the launch of the JP Morgan Macro Hedge Dual TR Source ETF (MHDU), a euro-denominated fund designed to provide cost-effective exposure to US and European equity volatility.

JP Morgan, Source roll out euro-tilted volatility ETF deploying VIX and VSTOXX futures

JP Morgan and Source have rolled out a European-tilted volatility strategy ETF, listed on the London Stock Exchange, deploying VIX and VSTOXX futures.

The fund is the second ETF in the JP Morgan Macro Hedge series launched in conjunction with London-based ETP provider Source. The first, the JP Morgan Macro Hedge US TR Source ETF (MHUU), was launched in February and now has assets of over $225 million.

Volatility is an attractive hedge in times of macro-economic stress – it tends to spike when equities and other risky assets crash. However, volatility exposure can be costly over the long term. JP Morgan’s Macro Hedge indices aim not only to capture spikes in volatility in times of market stress, but also, when markets are calmer, to generate a positive return.

The JP Morgan Macro Hedge Dual TR Index uses information regarding the degree of contango and backwardation across contract months to allocate volatility exposure in order to minimise the cost of contango and maximise the return to backwardation. The index takes exposure to US equity volatility via CBOE Volatility Index (VIX) futures, switching from long to long/short exposure depending on these conditions.

During times of market stress, the index can also add up to 25% exposure to European equity volatility via EURO STOXX 50 Volatility Index (VSTOXX) futures contracts. Although liquidity in European volatility markets still lags the US, the eurozone debt crisis has prompted more investors to include European volatility in their hedging strategies.

In terms of mechanics, when the VIX futures curve is in backwardation, the index takes a long exposure to VIX futures. When both the VIX and VSTOXX futures curves are in backwardation, the index takes long exposure to VIX futures (100%) and may add long exposure to VSTOXX futures (up to 25%). However, when the VIX futures curve is in contango, long futures positions incur a negative roll yield. To mitigate this, the index combines a long position in VIX futures with a short position in nearer-term VIX futures.

“This product could be particularly interesting for investors with focus on European markets,” says Rui Fernandes, Head of Equity and Funds Derivatives Structuring at JP Morgan. “By combining US and European volatility exposure in a single product, we can offer some regional diversification without compromising on liquidity.”

Source CEO Ted Hood, also commenting on the launch, said: “Source’s existing volatility products already account for over 70% of the assets in European-listed volatility ETPs. This new ETF, with its combination of US and European exposure, represents another step forward in the development of efficient volatility tools for investors.”

The fund is domiciled in Dublin, listed on the London Stock Exchange (LSE) and trades in euros. It is UCITS eligible and registered for sale in Austria, Finland, France, Germany, Ireland, Italy (for institutional investors only), Luxembourg, the Netherlands, Norway, Sweden and the UK.

The fund is aimed at sophisticated investors and comes with an annual management fee of 0.25%. An index cost of 0.75% per annum and certain notional rebalancing costs are included in the calculation of the benchmark.

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