Schroders has established a multi-strategy fund of hedge funds that invests in a portfolio of between 20 and 30 hedge funds.
Schroders alternative strategies fund diversified will aim to produce returns of between 6 per cent and 9 per cent a year, regardless of the direction of bond and equity markets.
The fund of funds is managed by a 10-strong investment team, with experience in risk management and fund selection. They will select funds that adopt a range of strategies, from low volatility arbitrage strategies to high-risk global macro strategies.
A multi-strategy approach was chosen because the diversity it offers was felt to be lower risk than investing only in arbitrage strategies, which may not perform well at all times in the economic cycle. The company says that although global macro strategies have fallen out of favour with many hedge fund managers, it has used this to make money when the stockmarket started falling.
The portfolio of funds will be actively managed by the investment team, who will monitor the performance of the funds. Funds that are not performing as well as expected can be replaced with other funds, but in practice, this is likely to happen infrequently.
The appeal of hedge funds lies in their ability to make money when stockmarkets are falling. Traditional equity and bond funds have greater correlation with those stockmarkets, so it is more difficult to deliver returns.
Despite Schroder's emphasis on risk management through diversification of hedge funds and strategies, the fund is still high risk and. It is likely to be of interest mainly to institutional investors such as pension funds and high-net-worth clients, although some may prefer products which steer clear of the higher-risk global macro strategies.