Type: Capital-protected fund of hedge funds
Aim: Growth by investing in a portfolio of hedge funds
Minimum investment: Lump sum $50,000, euros 50,000
Investment split: 100% in hedge funds
Place of registration: Bermuda
Return: Dollar-denominated bonds – 13-16%, Euro-denominated bonds 11-14% a year
Guarantee: Original capital returned in full at the end of the term regardless of performance of underlying investments plus discretionary profit lock-in
Closing date: October 3, 2006
Charges: Annual 3%
Commission: Subject to negotiation
Tel: 00353 1 6470060
This is a capital-protected hedge fund product available in a choice of euro or dollar-denominated bonds.
Chase de Vere research manager Justine Fearns says: “This is a fund of hedge funds product so is not going to be good for every adviser and every investor. The good thing is that it is being brought to us through Man Global Strategies. MGS is one of the most established names in the alternatives industry and has a track record in managing this type of product.”
Fearns points out that MGS will manage the underlying fund of hedge funds portfolio on an actively managed basis drawing on an already established and robust fund selection process. “It intends to create a diverse portfolio amongst at least three of the five major investment styles, including arbitrage, directional, equity hedge, long/short equities and managed futures,” she says. As well as diversification through style, the product also intends to diversify by manager and is currently running with fourteen hedge fund managers.
Looking at the product design, Fearns observes that Man Investors is offering two bonds targeting different returns, a euro class and a dollar class. “Despite targeting different levels, both return targets are high so will obviously appeal to the majority of investors but will only be suitable for some,” says Fearns.
Following the bear market, the demand for capital protection has increased so the protection offered on this fund may go down well in Fearns’ view.
“Credit Suisse International, a member of the Credit Suisse Group, provides the protection and acts as the swap counterparty. Investors should take comfort that such a strong name is working alongside the investment managers to deliver the product. It is worth noting that protection obviously isn’t suitable for all investors, for example those who have a higher tolerance towards risk may not want the cost of protection impacting on their potential returns,” says Fearns.
There is also a profit lock-in feature, which may be used in periods of sustained profitability to increase the value of the protected amount for the bonds. “The literature states that the feature will be used as often as possible during and at the end of each calendar year but this will only happen if the target investment exposure of the relevant bond reaches 150 per cent of its net asset value. This is potentially a tall order and will have cost money to build into the product but it is a nice feature and will offer investors some peace of mind that gains won’t be eroded if markets rise substantially,” says Fearns.
At the maturity date, Credit Suisse International guarantees payment of 100% of the initial investment amount plus any further capital from the profit lock-in feature.
Fearns regards the minimum investment and redemption limits are reasonable given the type of product. “A very positive point on the product is that all the third parties involved in the product are strong names in the industry, such as JP Morgan Chase and Credit Suisse International. As usual, the literature is as easy to read as it gets, if a little lengthy,” says Fearns.
Rounding up the potential drawbacks Fearns says: “The pluses and minuses of a product always depend on which angle you are looking at it from, so I’m looking at this product from a UK retail investor’s perspective, which is perhaps not really the target market for this product.
“A few areas that I would pick up on are the lack of a sterling share class, the maturity date and, linked to this, the capital guarantee only available on maturity. If I was being really picky I could also mention the redemption fees but products like this should be held for longer than four years so they aren’t really an issue.
Fearns thinks the lack of a sterling share class means that a lot of UK investors will either not be interested or will be uncomfortable due to the currency conversion. “Of course for higher net worth individuals currency is generally less of an issue; which is the same for discretionary portfolios and institutional investors.”
She also thinks the lengthy date to maturity in November 2018 will also be unappealing to most private investors. “While invested capital can be accessed relatively easily before the maturity date it will be subject to the market pricing at that time. The capital protection will be irrelevant so whether it was worth having in the first place could be questioned.”
Summing up Fearns feels although this is a good product, it is not suitable for her clients. She thinks it would have more appeal to institutional and high-net-worth clients.
Suitability to market: Poor
Investment strategy: Good