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The Neutral Factor

‘Too many cooks spoil the broth’ is an old saying that holds true today as well. Incidents of too many people worsening a situation have had the saying being repeated again and again. And that’s something that the fund managers of the JP Morgan India Alpha Fund have to try and not prove true. Why? Because the said fund has not one, not even two, but four fund managers – Mr. Harshad Patwardhan and Mr. Amit Gadgil to look after the equity component of the scheme and Mr. Nand Kumar Surti and Mr. Namdev Chogule to manage the debt portion.

And that’s not the only thing ‘different’ about the fund. An equity-oriented fund, JP Morgan India Alpha, has a unique strategy of aiming to wipe off market risks by adopting various market neutral strategies. Confused? Here’s how the strategy works… The strategy the fund will adopt is one that is being used by hedge funds. A market neutral strategy is one where the fund manager takes a long position (buy) and a short position (sell) at the same time. The idea is to generate returns over and above the market returns through superior stock selection skills and thus, reducing the market risk to nearly zero.

For example, if we look at the current hike in oil prices, it is beneficial for the oil companies but is not good for the airline industry. If the fund manager believes that the oil price hike would continue, he would buy the shares of an oil company and short sell the shares of an airline company, thus giving rise to two situations. The first situation is when the oil prices go upward and the market goes up, the oil companies would benefit from the strong market sentiments and strong oil prices. The second situation is when the oil prices start falling or a market situation indicates the decline in the oil prices, then the fund manager will close out the trade and thus the market neutral strategy is safely used.

But the success of this strategy lies in the competence of the fund manager and whether or not he is able to rightly capture the correlation and risk factors. Any incorrect estimation by the fund manager may lead to heavy losses. Although JP Morgan Asset Management Company has a considerable experience in handling similar funds globally, whether their experience would succeed to be a key factor in taking the Indian investors into confidence remains to be seen.

The scheme is an interval scheme that opens for sale and repurchase of units at fixed intervals.

Scheme Details:
Type: Equity Oriented Interval Scheme
NFO opens: July 31, 2008
NFO closes: August 29, 2008
Benchmark: Crisil Liquid Fund Index
Minimum Investment: Rs 5000
Fund Managers: Mr Harshad Patwardhan and Mr Amit Gadgil for equity, Mr Nand Kumar Surti and Mr Namdev Chogule for debt
Load Structure:
Entry Load: For less than Rs 5 crore, 2.25 per cent will be charged and for investments above Rs. 5 crore, load would be nil
Exit Load: For redemptions within 6 months from the date of allotment, 1 per cent load will be charged.