Direxion launches synthetic convertible security strategies
Direxion has expanded its suite of tradable mutual funds by launching the Direxion Indexed Synthetic Convertible Strategy Fund (DXCBX) and Direxion Indexed Synthetic Convertible Strategy Bear Fund (DXCVX).
The funds offer investors access to the risk/return characteristics of the convertible bond asset class through a synthetic approach that can potentially help alleviate liquidity, transparency and capacity issues that are characteristic of some traditional convertible bonds.
"We continue to seek ways for investors to gain exposure to different asset classes that allow them to trade freely," says Edward Egilinsky, managing director and head of alternative investments at Direxion. "These mutual funds provide our clients exposure to the convertible space without having to own the underlying bonds, which have certain limitations."
The bull and bear funds allow investors to access either side of the convertible bond market through a transparent and liquid approach.
"Our tradable mutual fund business continues to gain traction and we are committed to the development of innovative products within this business line," Egilinsky says.
The Direxion Indexed Synthetic Convertible Strategy Fund seeks to generate investment results, before fees and expenses, that replicate the performance of the QES Synthetic Convertible Index. The Direxion Indexed Synthetic Convertible Strategy Bear Fund attempts to obtain investment results mirroring the inverse of the performance of the same index, before fees and expenses.
The QES Synthetic Convertible Index was created to capture high correlation and similar overall returns to the convertible bond universe, and attempts to achieve its goal by investing in liquid market instruments that share comparable characteristics with convertible bonds. The index, which has the flexibility to rebalance weekly, first analyses aggregate data to determine how sensitive prospective investments are to factors such as changes in credit spreads, interest rates and equity prices. Then, it builds a portfolio composed of equity, fixed income and credit investments to generate synthetic exposure to those asset classes, with potentially greater liquidity than an actual convertible bond portfolio.
Convertible bonds may be less sensitive to rising interest rates and inflation than non-convertible bonds because of their embedded stock-conversion option.
"Our funds enable investors to potentially achieve convertible-bond-like returns through transparent, systematic strategies with daily liquidity," says Egilinsky. "There is continued interest from advisors in convertibles because they have different behavioural characteristics than other types of bonds, which may help provide diversification within an overall fixed income portfolio."
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