Investors will soon be able to protect their mutual fund holdings with a new hedging tool linked to two fund indexes.
Salomon Brothers and Lipper Analytical Services have teamed up to launch two options contracts linked to the performance of a pair of such indexes.
The contracts, the first of their kind, will debut at the Chicago Board Options Exchange on Dec. 3. The Salomon/Lipper indexes are modeled after two existing Lipper indexes. They will contain 30 mutual funds apiece, tracking both growth and growth and income stocks.
"What we have done is work with Lipper to modify those indexes in terms of how they're calculated, to make them more option and trading friendly," said a Salomon source who was involved in the process of creating the indexes. Growth and income account for approximately half the wealth in mutual funds, he said. "So those two indexes seemed the logical place to begin," he added.
Commenting on the debut of mutual fund index options, A. Michael Lipper, head of New York-based Lipper, said: "I think they're of great benefit to the sophisticated investor who can think in terms of a portfolio approach to investing."
But the options contracts could certainly be used by both the retail and the institutional investor, noted Mr. Lipper.
"The acquisition of Salomon by Travelers opens up potentially a very large user base at the retail level," he observed. "You could see them using this within wrap programs."
Mr. Lipper cited examples of how investors might employ these contracts. A player might use the option when he or she believes that growth and growth and income funds are going to do well, but has not fully completed research in the area.
By buying the index, "You could get the general rise which gives you time then to select one or more individual funds," said Mr. Lipper.
Also, investors who hold a long-established position in a fund, but are concerned about market conditions, can use the index to neutralize their position, he added.
Geoffrey Bobroff, an East Greenwich, R.I.,-based mutual fund analyst, noted that given the contracts' link to a mutual fund index-which contains managed portfolios-they should provide more guidance to investors than regular unmanaged stock index funds.
Other firms are exploring launching similar products, including Merrill Lynch & Co., said Mr. Bobroff.
However, Mr. Bobroff said that he does not think mutual fund options contracts will be as heavily traded as other derivatives tied to equity indexes. " I think it's just going to be too complicated for the consumer," he said.
