Most accepted that despite the possible introduction of retail hedge funds their incorporation into adviser businesses is likely to take time as there is a raft of new information for providers and advisers to absorb before they can offer them to customers without being in breach of TCF.
One point of contention was how this learning process would take place. IFG financial planning strategist Donna Bradshaw believes the general level of adviser knowledge in some areas has been overstated.
She says: “Hopefully there will be a fairly intense amount of education on how the ins and outs of hedge funds work as there is a level of sophistications that is not necessarily present in the long-only market that needs to be addressed.”
There was also the ever-arching question of transparency and what part a hedge fund offering should play within a client’s portfolio.
Both Bradshaw and BestInvest head of communications Justin Modray pointed to the bursting of the tech bubble back in 2000 as well as all the problems associated with with-profits that have made many advisers ultra-cautious of areas where there is limited information.
New Star director Ravi Anand says the growth of hedge funds in the IFA world is inevitable as clients look for a balanced portfolio. He says: “They should be bought purely for diversification while also pushing towards the absolute return mandate that the market is moving towards. If the issues of education and transparency are met there is no reason why the belief that it is good to go long cannot be said of manager who goes short.”
If the FSA’s new legislation on hedge funds is passed and comes into force in early 2008 advisers will have a new beast to deal with in the market, and the theory that the product is solely for the mass affluent will go by the wayside.
The two issues that do stand out are worries over transparency and education but the danger is providers will focus on addressing one while advisers will focus on the other.
What is needed is a united front to explain what the biology of a hedge fund actually is, and if advisers can understand those premises and relay them to their clients. As for transparency, realistically there is a middle ground that needs to be found, as the chances of the regime being as open as long-only offerings is not going to happen.
If all these challenges are met then hedge funds stand a chance, but even so we may have to wait for a bear market to learn their true worth as a business diversifier.