Deutsche Bank fund offers protection with call overwriting

Deutsche Bank has developed a fund based on benchmark indexes, using a call-overwriting strategy to provide downside protection for investors who want to invest in equities but are cautious about market outlook.

Deutsche's platinum overwriting plus fund is Ucits III-compliant and aims to reduce volatility using the enhanced option strategy.

The fund invests in benchmark indexes, the DJ EuroStoxx 50, DAX or SMI. The investor sells different types of call options based on the performance of the index. If the investor thinks there is little chance of the index going above the strike level they will sell an out-of-the-money call or if they have a range signal they can sell an at-the-money call. Selling the call allows the investor to collect a premium so they will lose less capital if the index is falling.

The fund can adjust the call option's strike price to reflect market direction. It seeks protection against a bear market by buying a put option and, when the fund predicts a short rally following a bear market, it will keep a delta one exposure to the index. The investor will receive the full upside if the market is growing and the fund provides daily liquidity.

"The fund has a mechanism whereby it can sell some of the upside performance aiming to generate excess return and is also able to buy downside protection so that it has the potential not suffer a total loss if the equity index it is tracking is falling," says Manfred Schraepler, head of funds at Deutsche Bank, based in London.

The bank is marketing the fund to institutional investors in the UK, Germany and Switzerland, in response to investor uncertainty in how equity markets will do in 2010. ""We have realised that investors who are holding equities for the long term have seen that returns are not always stable and profitable as equity markets go through different cycles. So we developed a fund that provides a risk managed alternative investment to equities and responds to a growing investor demand," says Schraepler.