Fidelity's Sanjeev Shah has been able to limit the downside on his £3.12bn Special Situations fund during the strong stock falls over the past month by using put options on the market.
Shah bought the options two months ago on the belief the market appeared overvalued.
He funded the move by selling call options higher up the market.
The manager removed 40% of the protection position last week, as the FTSE continued to slide from its April high of more than 5,800 to under 5,000 on Friday.
“With the Ucits III powers I am able to adopt certain strategies that protect the fund at certain points in time,” Shah, speaking at the 2010 Fidelity FundsNetwork Investment Forum, said.
“About two or three months ago I started becoming cautious on the market overall. It was a function of sentiment indicators I use and other inputs.
“As a result, I decided to buy protection on the fund by buying some put options on the market because volatility has come back down to historically low levels.
“With the call options higher up the market the net cost was zero, but it has made money overall as a result of the market declining.”
Shah also has about 5% of the fund in short positions on individual names, which includes mining stocks. “I probably took those out too early, but they are now starting to work,” he added.
The manager is still confident on equity market growth in 2010 however, believing the correction is a buying opportunity.
He sees opportunities in “cheap and unloved” UK sectors such as pharmaceuticals, real estate and media. Despite widespread negativity from the sell side, Shah said pharma stocks GlaxoSmithKline and AstraZeneca remain material parts of the fund.
Shah has become increasingly confident in his judgement, telling the conference he put a “significant amount of money” into his fund last Thursday.
