The Securities and Exchange Organization has approved regulations for leveraged funds in the stock market.
Reza Nowhi, the SEO deputy chief for investment funds, said the risk hedging property of such funds is attractive for both risk-taking and risk-avoiding investors.
“Stocks and stock rights constitute a majority of the portfolios of leveraged funds,” he was quoted as saying by the Securities and Exchange News Agency. In addition to stocks, the funds also offer derivative contracts as underlying assets.
Leveraged funds are mutual funds that use financial leverage techniques to gain maximum returns from an investment. Financial leverage includes option trading, short selling, etc. The funds deliver multiples of the benchmark or index that it tracks. Leveraged funds often use derivatives such as futures, options and swaps in order to enhance performance.
Leveraged funds are typically used by traders who wish to speculate on an index, or take advantage of the index's short-term momentum.
These fund offer investors a diversified asset portfolio within the capital market. This is possible even with smaller investments. A diversified portfolio ensures that the exposure to risk is balanced and there is higher probability for better returns.
The type of leverage funds the SEO is planning to launch comprises both “preferred” and “common” units, Nowhi said.
“The funds are designed in a way that guarantee a minimum return to owners of common units. Conversely, there is a ceiling for the gains.”
When the fund return is lower than the minimum rate, the loss is offset by investment return in preferred stocks. Likewise, when the gains in common units exceed the set ceiling the surplus gains are transferred to the owners of preferred stocks.
Preferred units are owned by underwriters of the fund’s units in the subscription stage but can be traded when the funds units are publically offered.
Leveraged funds can receive operation permit when investors subscribe for preferred units worth at least 5 trillion rials. Common units can be issued after the permit is issued.
According to Nowhi, the leveraged funds are suitable options for both risk-taking and risk-avoiding investment approaches.
“Risk-takers can invest in the preferred units [and maximize their profit] while risk-avoiders can make the minimum gains set for common units”. Authorized market making companies and asset managers can set up leveraged investment funds.
