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The Aviva Investors Index Opportunities Fund arbitrages liquidity and pricing anomalies that occur in stocks that are being excluded or included when indexes rebalance or restructure. It does this by taking long positions in stocks that are being added to global indices and short positions in stocks being deleted from global indexes.

The fund manager targets absolute returns of one-month Euribor plus 5% a year. At the same time the fund manager targets annual volatility of less than 7.5% with an average of 5%.

The strategy is both market neutral and uncorrelated to other asset classes. 

Because the risk of tracking error means many index fund managers only implement changes within their portfolio in the final days before an index is actually rebalanced, trading volumes surge and this can overwhelm available liquidity and temporarily force stock prices away from their fair value. 

Before the financial crisis, investment bank proprietary trading desks and hedge funds were highly active in this arbitrage strategy. Despite this high level of activity, academic research has shown the opportunity has been persistent and not arbitraged away. 

The scaling back of proprietary trading desk and hedge fund activity since the financial crisis together with increased volatility has potentially increased the opportunity set.

The fund’s investment objective is to pursue an absolute return strategy through investments in equities, equity-related securities, such as American depository receipts (ADRs) and general depository receipts (GDRs), options, swaps and futures on equities, equity warrants, participation certificates and profit-sharing certificates.

The fund exploits pricing inefficiencies arising from the requirement for many passive funds to adjust their portfolio immediately prior to effective date (ED).  The shortage of liquidity on the day before ED (for example, ED minus one) means the price of stocks entering the index or having an increased weighting rises above fair value while stocks exiting the index or having a reduced weighting are forced below fair value. Long and short portfolios are constructed to be market neutral and avoid any currency, sector or region bias.

The success of the strategy rests on combining index and active management skills. Index managers understand the opportunity and index movement while the quantitative managers help inform the investment decision-making process in areas such as analysis of price momentum and corporate profiles.

The fund’s investment universe includes various financial indexes in Europe, North America, Japan, Asia-Pacific and emerging markets such as Eurostoxx50, Dow Jones, FTSE, MSCI, Nikkei, S&P's indexes. There is no fixed list and the fund will take advantage of index events wherever appropriate opportunities arise.

There are no country or sector constraints. The fund does not have a benchmark index other than one-month Euribor so there is nothing against which bias can be measured.

The fund can and often does have strong temporary biases relative to conventional global indices such as the MSCI World mainly because the investment universe is limited to securities involved in index rebalancing or reweighing.

The fund is actively managed, with long and short positions taken before the announcement date and then monitored on a daily basis until after the effective date. A typical holding period for both long and short positions is less than 30 days.

Fund facts
Full name of fund: Aviva Investors Index Opportunities Fund
Name of portfolio managers: Iyad Farah and Ned Kelly
Name of investment/management company: Aviva Investors Global Services
Contact information: jerome.nunan@avivainvestors.com; gary.saidler@avivainvestors.com
Launch date: April 23, 2010
Assets under management: €175 million (at April 3, 2011)
Net cumulative performance since inception: 102.47% (euro I share class, May 4, 2011)
Annualised return: 102.48% (euro I share class; May 4, 2011)
Annualised volatility: 2.16% (euro I share class; May 4, 2011)
Sharpe ratio: 0.78 (euro I share class; May 4, 2011)
Strategy: equity market neutral
Share classes: euro (I, A and B classes) sterling (hedged I class)
Administrator: Aviva Investors Luxembourg
Auditor: Ernst & Young
Depositary: JP Morgan Bank Luxembourg
Prime broker: Bank of America Merrill Lynch
Legal counsel: Elvinger, Hoss & Prussen
Domicile: Luxembourg
Management fee: 0.45%
Performance fee: 10% of performance above EUR001M
Minimum investment: €500,000 (I share class)
Lock-in: none
Redemption/liquidity terms: daily liquidity