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The new vehicle, which is currently being tested, would be run by Stephen Crewe and Chris Childs of the alternative investments team and would sit between F&C's existing £23m Blue fund and its €112m (£90m) Sapphire fund.

Should F&C decide to go ahead with the fund, it will aim to launch it towards the end of the fourth quarter.

A spokesperson for F&C said the potential for the fund has been mainly motivated by strong positive feedback from some of the group's key discretionary clients, who have expressed interest in funds with low correlation to equity markets.

The vehicle would aim to have a low-volatility portfolio and would be structured as a Ucits III Sicav fund with multiple currency share classes. The management team would utilise a basket of derivative trading strategies such as credit hedges, variance swaps and market neutral options.

The equity portion of the portfolio would consist mainly of large-cap holdings and would be centred on Europe, the US and Japan.

Mr Crewe already has experience of using such strategies in his Sapphire fund, and Mr Childs has also used the same approach in his £274m High Income fund.

The team believes the opportunity set for a potential new fund is sufficient to deliver a target return profile in the region of cash plus 2-4 per cent net of charges, but with low volatility.

Mr Crewe said: "We will mainly be targeting the high-end complex investor who has expressed interest in an absolute return fund, but doesn't necessarily want to go down the hedge fund route. Our product will be chiefly cash, which historically has a low correlation to equities and debt.

"Although it is different to ours, the success of BlackRock's fund shows that there is a strong demand for such products. Yet while BlackRock relies on its stock-picking ability, we will concentrate on using derivatives."

Mr Crewe added the fund would utilise F&C's independent risk team to keep track of the fund and make sure the strategies were being used effectively and undue risk was not being taken.

F&C is the latest house to launch a fund to challenge BlackRock's crown in the absolute return space. In July JPMorgan launched a new sterling share class for its Highbridge Statistical Market Neutral fund to compete with Blackrock's £1.4bn UK Absolute Alpha fund.

New Star Asset Management recently confirmed it is considering the possibility of launching its own absolute alpha fund for manager Tim Steer.