With the end of the bull market in shares – where good returns seemed virtually guaranteed – the interest in such funds has rocketed. Investors want ways to make money even if the world’s stockmarkets fall.
Hedge funds seem able to deliver on this promise. “What you’re trying to do is make absolute real money whatever’s happening to the mark
et,” says John Chatfeild-Roberts, a director of Jupiter Asset Management.
How to invest
For most investors the only way to invest in hedge funds is through a “fund of hedge funds” – usually structured as offshore companies which invest in a range of hedge funds. While direct investment into hedge funds normally costs at least $500,000 (£360,000), funds of hedge funds can sometimes be accessed for as little as £5000.
Most funds of hedge funds invest in a range of investment strategies (see Inside hedge funds). But there are some which specialise in one strategy or another.
With the mainstream markets in the doldrums a large number of fund management groups have launched such products recently. Some of these are management groups who are already known to mainstream retail investors while others are more specialist operations. The former include the likes of Deutsche, Global Asset Management, Henderson Investors, HSBC and Lazard. The latter include the Bank of America, CSFB, Dawnay Day Olympia, Frank Russell, the Man group, Matrix, Merrill Lynch, Momentum, Morley and Save & Invest. Jupiter is also planning to launch a fund of hedge funds soon.
Nicola Meaden, the chief executive of Tremont Tass (a hedge fund research group), argues that such vehicles are not necessarily any more risky than conventional funds. “In principle they’re a very good thing for retail investors to invest in”. She adds the important caveats that it is important for investors to ensure that they chose a well managed fund with reasonable charges.
Regulatory concern
However, the Financial Services Authority (FSA) has expressed reservations about the sale of such products to private individuals. While it is not against funds of hedge funds in principle it is anxious that the risks inherent in such products can be difficult for less sophisticated retail investors to understand.
In particular the City regulator is worried that the packaging of such products within Individual Savings Account (ISA) may obscure the risks involved. Oliver Lodge, an associate in the investment business policy division of the FSA, told a hedge fund conference in February: “ISAs may have something of a halo effect for investors. Managers and advisers must make every effort to ensure that the product is not sub-consciously characterised by investors as being safer than it actually is.”
Since hedge funds use a wide variety of unconventional techniques to generate returns it is not possible to collect standard information on their portfolio holdings. Unlike normal funds their assets cannot be broken down into the percentages held in particular companies. Instead they might be betting on how two securities move relative to each other or on falling markets.
