Dynamic direction
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That is completely untrue. If anything, the hedge managers who, for example, "shorted" bank shares were the messengers telling regulators and politicians that something was wrong. The trouble is the messenger gets shot for bringing bad news. We should remember that even when the "shorting" of banks was banned, their share price kept falling.
Now I have got that off my chest, let us look at the new fund. Cazenove absolute UK dynamic will be run by Neil Pegrum who has over 20 years experience and has been running a pure hedge fund for the last four years. His long-only fund, UK dynamic, has a fine record too. This has averaged 15 per cent a year, which, given the volatility in the markets, is a quite remarkable performance. The new fund will invest in UK shares with a bias towards medium-sized and smaller companies with around 30-60 stocks on each side of the balance sheet, that is, long and short.
Pegrum adopts a stockpicking approach, a description which I find leaves many investors scratching their head. After all, isn't every fund manager a stockpicker? Yes and no. Many managers have a more benchmark-orientated approach and are chiefly concerned with how much above or below the index weighting their investments are.
Pegrum undertakes some 300 company meetings a year, looking for ones he believes will do well. He favours those with high barriers to entry and quality management but then also looks for turning points which could materially affect the movement share price. In looking at shorts, that is, stocks that he wants to sell, he uses the existing investment process but somewhat in reverse. There, he is looking for stocks that are overvalued, where analyst forecasts might be wrong and where the business might be fundamentally flawed.
The fund will have no constraints in terms of exposure to individual sectors and will not borrow to invest. However, it can have gross exposure up to 300 per cent through a combination of long and short investments. In practice, however, the fund's net exposure will not exceed 75 per cent. The overriding aim is to achieve an annual return better than 10 per cent over the long term, which is an ambitious but achievable target.
There are no guarantees in this world but for those who want some kind of insurance in their portfolio - perhaps because you are nearing retirement or you just want to limit the potential downside - this is a fund to seriously consider. However, don't look for too long because I believe Mr Pegrum will limit the size of the fund and will certainly be reviewing it if it reaches £100m.
This is not to suggest it cannot disappoint. In a long bull market, a long-only fund is clearly far better placed to outperform but I do find it hard to envisage a long bull market at present. More likely, we will just see spikes upwards (as we have just witnessed) followed by sharp downward lurches as new economic news drives the market one way or another.
The only thing about the fund I do not like is the performance fee structure, which is 20 per cent of all positive performance, subject to a high watermark. It seems to me that while cash returns are currently so low, we could be paying an extra free for the manager simply matching cash returns. Performance fees are non-transparent and nor do I believe they align the interests of the investor and fund manager.
I wish performance fees did not exist but the sad fact is they are an entrenched part of the industry. I always try to consider funds on a case-by-case basis, and in some instances the strength of the investment process and the skill of the manager outweigh the negatives of a performance fee. After all, in many aspects of life sometimes you need to pay a premium price if you want a premium product. I will be buying some of the fund myself and expect to hold it through thick and thin for many years.
Mark Dampier is head of research at Hargreaves Lansdown
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