Abstract

It was early January 2017 and the fund manager of ICICI Prudential Value Fund Series 7 (D), Atul Patel (Patel), was worried about protecting the Net Asset Value of his fund. All the stocks listed in the fund portfolio had been chosen with care and he was sure that the fund was fundamentally strong. In fact, he wanted to hold the current positions at least for the next three months. However, his worry was that the prevailing market conditions, economic environment, and global political conditions could lead to fluctuations and adversely impact the fund portfolio value. The Net Asset Value of the fund had already been adversely affected in the face of the prevailing market volatility. Having been a successful fund manager all through, he was concerned about this issue. To buck this trend, he was looking for instruments to hedge against market risks associated with his fund portfolio. However, he was not very sure what type of hedging would provide him with the best possible result, subject to so many constraints.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• To understand how fund managers measure the risk and return and style of a fund’s portfolio
• To explore various derivate instruments available for hedging market risk
• To experience how to protect the Net Asset Value of a mutual fund scheme
• To determine the applications of index futures to mitigate market risk
• To demonstrate the concept of Minimum Variance Hedge

Keywords

Net Asset Value, Mutual Fund, Optimal Hedge ratio, Options, Futures, Investment Analysis, Portfolio Management, Portfolio Hedging, Index Futures, Minimum Variance Hedge, MVH.