I applaud the innovative structure of the fund, the efforts that BlackRock has made to build a profile and track record for the fund and, most important, Mark Lyttleton’s ability to evolve an investment process that has delivered good returns for the long-only UK dynamic fund into a market-neutral portfolio incorporating long and short ideas as well as so-called pairs trades. This is no mean feat. Many managers have found the challenge of generating alpha from short-selling to be beyond their capabilities. Nevertheless, I am sure Mr Lyttleton would be the first to admit that he keeps on learning every day. The market quickly humiliates the over-confident.
What can investors learn from this fund and others in its peer group? First, the sector is very immature and few of the 17 funds have developed a decent track record or sustainable asset base. There are few immediately obvious alternatives to BlackRock’s fund. Ultimately, I believe that greater fund choice would make the sector more interesting.
Second, investors need to appreciate that these funds should not be expected to deliver continuous positive returns month in, month out. They could go down in value, especially if they use leverage, which could make them more volatile than conventional long-only funds. Moreover, for funds that are market-neutral – do not have exposure to market movements – investors must appreciate that they are likely to substantially underperform a sharply rising market.
At Maia Capital, we are encouraged that a number of hedge fund companies are planning or have already launched funds into the retail market but some of the problems of the sector remain – liquidity can be poor, transparency can be non-existent and fees are still high. I cannot believe many IFAs would be keen to recommend funds charging 2 per cent plus 25 per cent of subsequent performance, especially when retail fund charges are under acute pressure. It also reaffirms the need to select and combine funds just as carefully as with long-only funds and this is where we believe an astute multi-manager can help. As ever the underlying message is caveat emptor.
In capricious markets, a fund offering the potential to deliver an absolute return is attractive but is not an investment panacea.
Chris Ralph is a partner at Maia Capital