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Forsyth explores fixed interest hedge funds

FORSYTH PARTNERS FORSYTH ALTERNATIVE INCOME FUND

Type: Hedge fund of funds

Aim: Income and growth by investing in fixed interest hedge funds, sovereign, corporate and emerging market bond funds

Minimum investment: Lump sum $20,000

Place of registration: Cayman Islands

Investment split: 100% in fixed interest hedge funds, sovereign, corporate and emerging market bond funds

Charges: Initial up to 3%, annual 1.25%

Commission: Initial up to 3%

Tel: 020 8649 9440

The panel: Chris Cole, Account manager, Chase de Vere,
Nicholas Howe, Portfolio manager, Accrue Investment Management,
David Flowers, director, Ronald Blue & Co,
Kevin Morgan, director, Ezi UK

Suitability to market 6.0
Investment strategy 6.5
Past performance 5.0
Company&#39s reputation 5.3
Charges 5.0
Commission 5.0
Product literature 6.5

The Forsyth alternative income fund is a hedge fund of funds that aims for income by investing in hedge funds, emerging market, corporate and sovereign bonds.

Assessing the fund&#39s market suitability Howe says: “The fund has a similar structure to other existing fund of fund hedge funds and has a focus upon fixed-income strategies. It aims to provide positive returns in both rising and falling markets and should be popular in these times of uncertain markets.” Flowers says: “It is a neat marketing message, an alternative form of generating income at a time when income is generally low. There are no other hedge fund of funds with an income stream.”

Cole says: “Chase de Vere believes hedge funds of funds are appropriate for the more sophisticated investor who would normally have a total portfolio in excess of £500,000. Hedge funds are not normally designed to provide an income stream and therefore the concept of the Forsyth offering is a refreshing one. It combines relative value and arbitrage strategies with traditional high-yield fixed-income bonds to create a bespoke income producing product.” Morgan says: “It is quite innovative. Fixed-income hedge funds are hardly commonplace. With demand for income generating products rising, the fund will reach a willing and receptive audience &#45 both IFA and consumer.”

Considering the type of client the fund could attract Cole says: “Sophisticated income seekers who have a good general understanding of investment markets and a minimum overall portfolio size of £500,000.” Morgan says: “Due to the fund&#39s structure, it will appeal to those who are prepared to take a higher degree of risk than your typical investment-grade corporate bond investor.” Howe says: “The fund is only suitable for experienced investors due to the complexity of its structure, underlying investment objectives and strategy. It would be suitable for high-net-worth individuals with a diversified portfolio of existing investments.”

Turning to the fund&#39s marketing potential Flowers says: “It should open up the income market but potential investors will be sophisticated enough to seek out alternatives for income.” Morgan says: “As the fund is employing a relatively new investment approach in the income arena, interest will be generated. It gives IFAs something new and interesting to discuss with clients.”

Highlighting the main useful features of the fund, Flowers goes for the low minimum premium for entry into the hedge fund of funds market. Howe agrees but also mentions the diversification provided by funds of funds, the independent nature of the fund manager, currency hedging and the half-yearly income.Morgan likes the fund of funds approach and the intention not to erode capital to make dividend payments. He also points to the skill-based investment strategy with managers remunerated on performance. Cole says: “We like the inclusion of emerging market bonds as many private investors do not have access to this asset class.”

Analysing the investment strategy Flowers says: “I am always wary of an income strategy that relies on capital growth and is distributed at the discretion of the manager. I would prefer a growth fund and leave it to the investors to withdraw capital as needed.” Howe says: “The strategy is a very valid one in present markets with exposure to all areas of fixed interest. The currency risk is also hedged to reduce risk further. The performance based fee should improve results.”

Cole says: “The investment strategy is consistent with the funds&#39 stated objectives. We wait to see if this strategy will produce the returns appropriate to maintain the income. We wait to see if these income estimates can be produced and maintained.”

Pointing to the fund&#39s drawbacks Howe says: “It only focuses on fixed-interest strategies and only deals on a bi-monthly basis. Dividends can be paid from capital, which may cause some capital erosion. There is no guarantee that the 7 per cent income will be initially paid or maintained in the future.” Morgan says: “The perceived uncertainty and the links to the Cayman Islands hardly fills one with a warm glow of security. However, the fund appears well structured and the allure of 7 per cent income a year will help.”

Flowers says: “There is no track record to speak of. The fund is not cheap &#45 it has an annual charge of 1.25 per cent plus a high performance fee and an exit penalty. The managers are unwilling to disclose the contents of the portfolio so it is difficult to make a judgement.” Cole says: “The disadvantages are generic to the hedge fund industry. These are high charges, relative opaqueness for the investor and taxation issues for UK resident individuals.”

Discussing the company&#39s reputation Cole says: “Forsyth has a very good reputation in the research of long only funds. It has increasing experience in the hedge fund market place. Howe says: “It has a good reputation for providing research on mutual funds. It is obviously using this research base to select individual funds within this product. I have not had any experience of its fund management so cannot comment on the reputation in this area.”

Morgan says: “It is strong and reputable within the mutual funds industry and restricted fund research services for IFAs.” Flowers says: “I can&#39t find anyone in the hedge fund business who has heard of the company. With no track record, it is hard to judge.”

Moving on to past performance Flowers says: “There is only a back-tested portfolio based on an indicative fund and that&#39s not much use.” Howe says: “Again, I have no experience but the indicative percentage monthly rates of return provided are impressive bearing in mind the performance of the markets.” Cole says: “This is a new fund launch and therefore it would be hard to compare or provide information on Forsyth&#39s track record in this area.”

Identifying the main competition, Morgan suggests high-income corporate bond funds. Flowers says: “Growth hedge fund of funds or traditional fixed-interest funds.” Howe suggests Henderson, Jupiter and Man Group. Cole says: “It would be possible of an advisor to create their own version of the fund but adds the Forsyth fund is well packaged.

Turning to charges, Flowers thinks they are on the high side but Morgan thinks they are reasonable. Howe says: “The charges are fair on an ongoing basis at 1.25 per cent with a performance fee of 20 per cent of the return in excess of 7 per cent a year. The initial charge seems high bearing in mind that an exit fee is also charged.” Cole says: “The charges fall into line with other offerings, although we are never keen to see redemption fees on these types of structures.”

The panel think the commission is standard and therefore reasonable.
Looking at the product literature Morgan says: “The glossy flyer is ok but it could be a little more meaty, although the prospectus carries the dry but very important bits.” Howe says: “The colour fold out brochure is very clear, concise and explains the product and the strategy very well. The prospectus is not very user friendly but they never are.”

Summing up Flowers says: “I am not averse to hedge funds but there is simply not enough information available about this product to encourage me to recommend it.”

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