A fund derivative is a financial structured product related to a fund, normally using the underlying fund to determine the payoff. A collective investment scheme is a way of investing money with other people to participate in a wider range of investments than those feasible for most individual investors This may be a mutual fund or a hedge fund. A mutual fund is a professionally managed type of collective investments that pools money from many investors and Invests it in Stocks bonds, A hedge fund is a private Investment fund open to a limited range of investors which is permitted by regulators to undertake a wider range of activities than other investment
Purchasers might want exposure to a fund to get exposure to a star fund manager or management style as well as the asset class.
Typical fund derivatives might be a call option on a fund, a CPPI on a fund, or a leveraged Note on a fund. Example of a call option on a stock Buy a call The buyer expects that the price may go up Constant proportion portfolio insurance (CPPI is a Capital guarantee Derivative security that embeds a dynamic Trading strategy in order to provide More complicated structures might be a guarantee sold to a fund that ensures it cannot fall in value by more than a certain amount. Maturities might be 3 to 10 years.
The big players in this field are BNP Paribas, Societe Generale, Barclays, Deutsche Bank, Citigroup, Credit Suisse, etc.
Fund derivatives have had explosive growth over the past 10 years but are still a major growth area. New structures are constantly being developed to suit market and client opportunities.