MAKING money in bear markets generally is more difficult than making money when markets are rising, but a boutique fund manager claims to have a product that does exactly that. Close Fund Management, the British-based asset-management subsidiary of merchant bank Close Brothers, has launched an open-ended GBP10 million (about HK$126.7 million) Escalator Fund that it claims will limit investors' losses to 5 per cent while gains are unlimited. Available in Hong Kong through HSBC Securities, two-thirds of the Close Far East Escalator will be invested equally in Japan and Hong Kong while the remaining third will be put into Indonesia, South Korea, Malaysia, Singapore and Thailand. By keeping 95 per cent of the fund invested in cash and fixed-income instruments, Close expects to keep returns stable. The remaining 5 per cent will be invested in a series of index options. As the index rises, the 5 per cent in index options should rise commensurately. If the market collapses, only 5 per cent of the fund potentially would be affected. The part of the fund that is in cash and fixed-income products should be safe. By buying a series of index puts and calls, the fund hopes to minimise the cost of the option to the investor and exploit upward volatility. 'The aim of what we are trying to do is reduce risk,' said Marc Gordon, the managing director of Close Fund Management, which claims to manage the largest range of protected unit trusts in Britain. The fund is similar in structure to a range of funds introduced early last year and in 1996 by Jardine Fleming Unit Trusts, whose 'guaranteed-capital' funds promised to put a floor under an investor's potential losses and provide an enhanced return. Jardine Fleming's Thailand Capital Guaranteed Trust has gained 4.89 per cent in the past year, according to Lipper Analytical Services Asia. The Close Brothers Fund will reset itself every quarter to allow for greater returns over the long term. At the beginning of each quarter, the minimum price for the end of the quarter will be set at 95 per cent of the value of the units at the beginning. The structure is designed to ensure that whenever investors buy units in the fund, the minimum price will always apply, thereby protecting the value of their investment. Mr Gordon says the roughly 60 per cent fall in Japan's Nikkei 225 average since the beginning of that country's bear market in 1990 would have actually seen the Escalator Fund rise in value by 60 per cent because losses would have been limited and the fund would have benefitted from the occasional upward spike characteristic of any long-term fall. 'Markets do not go up in a straight line, and they do not fall in a straight line,' Mr Gordon said. He says the fund would fail to provide the best returns for investors only if Asia's markets suddenly were all to rise at the same time for a prolonged period. Conversely, a prolonged fall would also damage the fund's ability to protect investors' capital. 'The worst scenario for our funds is that the market is always going down on a continuous basis. I can't speak for other markets, but the last time the London market went down for four consecutive quarters was 1974,' he said.