Aviva launches Index Opportunities fund

Aviva Investors has launched its Aviva Investors Index Opportunities fund into the British and European markets.

The Ucits III fund, which was originally launched internally with seed money from Aviva in April, aims to provide investors with absolute returns by taking advantage of pricing inefficiencies.

Such inefficiencies are generated, for example, when equity indices are rebalanced through the use of active stock analysis and portfolio construction skills, alongside index analysis and value added execution.

The Aviva Investors Index Opportunities fund is designed to be uncorrelated to other asset classes. Iyad Farah and Ned Kelly, the lead managers on the fund, and their team monitor up to 25 indices across Europe, North America, the Asia Pacific region and other emerging markets. (article continues below)

Each of these indices will rebalance between one and 12 times each year. This means passive funds have to adjust their portfolios which will impact liquidity.

In order to exploit those pricing anomalies, the fund will adopt long positions in stocks the managers expect to be included in the index and short positions in those that are likely to be excluded. Its long and short portfolios are constructed to be market neutral and avoid any currency or regional bias. 

The fund aims to generate absolute returns of one-month Euribor plus 5% per year. Its volatility is expected to be lower than 7.5%, averaging about 5%.

Farah, who is also director of quant solutions at Aviva, says the rapidly growing market of index tracking funds has created greater anomalies in the marketplace.

Naturally passive investors allocate their money in proportion to the market capitalisation of existing companies. Farah says this is an inefficient allocation of capital. Rebalancing the indices themselves creates even more inefficiencies prone to arbitrage.