The fund will invest in a range of hedge fund strategies through institutional sterling-denominated shares of the Matrix open ended conservative approach strategy fund, using a feeder and master fund structure.
The master fund is designed to provide annual returns of 4-6 per cent above Libor, with a similar level of volatility to UK gilts. It invests in a portfolio of 30-40 hedge funds that have a low correlation with each other across a spread of styles and strategies. Returns are hedged back into sterling to protect from fluctuations in the dollar and sterling exchange rates, but minor fluctuations may still occur.
Matrix has appointed US portfolio managers Lyster Watson as investment manager. Its investment policy committee determines strategy allocation at the end of each year. They review the portfolio every quarter, so that allocations to each strategy may be higher or lower than the target.
Underlying managers are selected on the basis of various criteria. They should not depend on rising markets to produce returns, they will have appropriate risk controls in place and invest their own money in the hedge funds they run. Lyster Watson will not invest more than 10 per cnet in each holding and if the positin grows, they will not allow it to exceed 20 per cent. They will not invest in real properties, physical commodities and hedge funds which use high leverage.
Strategies the fund may invest in include long/short equity, where managers buy stocks that will go up by more than the market and sell equities they think will go down. A wide range of arbitrage strategies may be included, which exploit price inefficiencies between different assets issued by the same company, between fixed income securities and derivatives and between volatility levels within asset classes and the implied by options on those assets. Computer driven strategies such as statistical arbitrage and quant strategies may also be represented, along with event driven, global macro and managed futures.
The resulting portfolio is diverse, so in theory it should perform in all market conditions, as some strategies in the portfolio will keep it ticking over while other strategies lag behind. However, there is no guarantee that the underlying strategies will continue to perform as expected.
Liquidity could also be a problem. Daily dealing may be available through a stockbroker is a positive, but the fund invests solely in a fund which has restrictions on redemptions. There is a matched buyer service, which matches subscriptions and redemptions, but its usefulness depends on whether people want to buy or sell at the same time.