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Surge in volatility ends plan to raise a low volatility fund

Maybe we can put it down to the recent period of high volatility in global equity markets.

And that explanation is certainly understandable given that volatility – in large part sparked by moves taken in China and reacted to in the rest of the world – has been dramatic. For instance, a chart on the VIX, a measure of the implied volatility on the S&P 500 index options, shows levels in the mid-teens for most of the past six months.

But a couple of weeks back that pattern was broken with a sudden jump to around 40. Over the past few trading sessions, volatility has fallen – though the level remains above the average over the past six months.

That pattern of volatility has proven to be an unfortunate time to file for an offering of a closed end product known as the Low Volatility Global Income Fund.

The fund aimed to generate five per cent in annual distributions and capital gains. It would do that by investing in companies included in the S&P Global 100 Index. But the investments would be restricted to companies whose so-called beta was less than one. Beta is normally defined as the ratio of the particular company’s volatility relative to the market. As of the date of filing, the manager (Strathbridge Asset Management Inc.) could have invested in 52 of the 100 stocks in the index.

Accordingly, low volatility stocks underperform the market when the overall market is rising but outperform when the overall market is falling. In this way, for low beta stocks the highs aren’t as high while the lows aren’t as low. For a market cycle, the plan is to do better than the market.

At least that was the plan when the fund was launched at the end of July. But the fund didn’t attract enough investor interest and has now been postponned.

For a closed end fund to be successful, the normal rule for is a minimum raise of $20 million. Because that amount wasn’t raised the manager is left having to pay the new issue expenses, which the preliminary prospectus estimated to be a maximum of $600,000.

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Purpose nets $30 million

While Strathbridge’s Low Volatility Global Income Fund didn’t get across the line, a fund from Purpose Investments with a revamped fee structure, did find some traction with investors.

Purpose Investments Inc., along with the promoter National Bank Financial, was successful in raising $30 million for its Investment Grade Managed Duration Income Fund.

That fund used what’s known as a unit traded fund structure to raise the $30 million. The structure was developed to ensure that all the gross proceeds became the same amount of net proceeds. In other words, there were no up front agents fees, instead the total fees would be both a smaller amount than normal and paid over time.

Trying to ensure that the units of the fund traded closer to net asset value (on this fund the goal is to have it trade at 98.50% of NAV) was the other reason behind the structure.

The fund, on which Chicago-based Nuveen Asset Management is the sub-adviser, didn’t strike a chord with all the underwriters. For whatever reason, two of the bank-owned firms, RBC Capital Markets and TD Securities, decided not to sell the offering to their clients.

Source: http://business.financialpost.com/news/fp-street/surge-in-volatility-ends-plan-to-raise-a-low-volatility-fund

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