This spring is likely to see the blossoming of the hedge fund sector into the mainstream investment market with the launch of several funds.
Traditionally, hedge funds have been seen as risky investments and the preserve of the rich, associated with big-name players such as George Soros. They have carried a reputation for high risk but are undergoing an image change.
Both Deutsche Bank and Matrix Securities are launching hedge fund products for the retail market. Abbey National Asset Managers is planning to market three hedge funds for wealthy private investors and institutions.
The Deutsche product will be called Xavex and will be an Isable product with a minimum investment of £7,000. It will be a fund of hedge funds, holding around 20 hedge funds, making the product far less volatile than a single hedge fund.
The Matrix product, to be launched on February 5, is called the Conservative Approach Strategy fund in a deliberate ploy to play down connotations of risk. Matrix's promotional literature does not use the term hedge fund, preferring to call it a fund of alternative investment funds.
Most hedge funds are unregulated investments based offshore and so do not come under the eye of the FSA. For this reason, most IFAs are not permitted to market them.
This limitation, together with a historical approach of minimum investments in the region of £100,000, has prevented hedge funds becoming available to the man in the street.
At present, there are around 4,300 IFAs authorised to deal with hedge funds. But as Xavex will be listed on the London Stock Exchange, any IFA will be able to promote it but those wanting to offer hedge funds should contact the FSA to confirm their status.
The Matrix fund is quoted on the Irish stock exchange and so only specially authorised IFAs can market it.
Xavex, registered in Guernsey, can be listed on the London Stock Exchange as it is an investment company, being a fund of hedge funds and not a hedge fund itself. Deutsche is waiting for approval of the product but does not foresee any regulatory problems.
Xavex will be completely transparent, Deutsche says, with the holdings published monthly on a website.
Deutsche director of investment funds research Martin Fothergill believes the risk in hedge funds has been overplayed. He says: “Some hedge funds are high-risk. A lot of others are very conservatively managed. Hedge funds are uncorrellated to equity markets and also uncorrellated to each other. Therefore, when you combine them in a fund of funds the risk goes down.
“If you put a diversified portfolio of hedge funds into an equity portfolio, empirical data shows it reduces the risk of the whole portfolio and increases the return.” He recommends 5 to 15 per cent exposure to hedge funds in a portfolio.
The Matrix fund has a minimum investment of £10,000 or $15,000. Its Irish stock exchange approval means it qualifies fully for Sipp and SSAS investments. It offers two classes of shares – a dollar class at the mercy of currency fluctuations and a sterling class. It aims to produce 12 to 14 per cent a year growth in dollars and 10 to 12 per cent in sterling, with volatility no greater than the fiveto 15-year Government gilt index.
Matrix director Bridget Cleverly says: “We are using Tremont advisers, one of the top three fund of hedge funds advisers in the world. Employing such a professional team, which has 75 staff, provides best of breed managers who can vary allocation as macroeconomic events change.”
Hedge funds use a number of strategies, based on the theory that inefficiencies in the market mean opportunities arise where investors can exploit mispriced securities without incurring excessive levels of risk.
For example, an equity market neutral strategy aims to find pairs of shares that historically have traded within the same trading range but are currently outside their longer-term trading range. The manager buys the one he believes is underpriced, sells the overpriced stock and waits for the spread to close.
Xavex will be marketed through IFAs who will be watching the success of the new hedge fund products with interest. Some IFAs believe access to well-motivated fund managers given greater freedom to invest will appeal to the UK consumer.
Hargreaves Lansdown investment manager Ben Yearsley says: “I think consumers will go for it. We are very keen on the Xavex product. You can get it in an Isa, it is low risk and it is targeting growth of 12 to 15 per cent.
“Hedge funds have been completely misunderstood. They are associated with George Soros and his breaking of the Bank of England. But there are low-risk products. The job for IFAs will be to educate the investing public. There is no difference between low-risk and high-risk unit trusts. With time you will have a similar range of hedge funds.”
Yearsley believes Xavex is coming at a good time for IFAs. He says: “Isa sales have been a bit slow recently and it will give a welcome boost to the Isa market.”
Chase de Vere marketing sales and investment manager Anna Bowes says: “We shall be looking at these developments with interest. Something new on the market is always welcomed.”