Aviva to launch arbitrage fund

Aviva Investors is launching an arbitrage fund that aims to profit from the forced buying and selling activity of the ever-growing army of passive funds.

Its Index Opportunities Fund will take long positions in stocks scheduled to enter one of 25 indices at their periodic rebalancing, which passive funds will then be forced to buy when the rebalancing takes effect. It will likewise short stocks due to be demoted in the knowledge index funds will have to sell.

It claims the fund can profit from price “inefficiencies” to produce returns uncorrelated to other asset classes. It is targeting a return of five percentage points above one-month Euribor.

Jerome Nunan, client portfolio manager at Aviva, argued that retrenchment by bank proprietary trading desks and deleveraging by hedge funds meant the opportunities thrown up by index rebalancing were less likely to be arbitraged away.

One other fund is known to specialise in this strategy, Dexia Asset Management’s €1.9bn ($2.7bn) Index Arbitrage fund, which has been soft closed since April. It has returned 11.5 per cent over the past three years.

Mr Nunan denied that the fund’s returns would come at the expense of passive investors.