Ucits III funds that give managers more investment tools should (in theory) allow funds to make money in these difficult markets. It, of course, also gives them a chance to lose more too. I see more of these funds being launched but the skill of using shorting effectively is not an easy one, nor is it very widespread.
Short selling, and the associated hedge fund industry, has been made a scapegoat by politicians who are both economically illiterate and desperate to deflect blame from themselves. Contrary to popular belief, hedge funds did not ruin the banks, they were simply the messenger that brought bad news. If we look over history, we can see that often the messenger will unfairly get the blame.
SVM, a small Scottish boutique headed by Colin McLean, has just launched its own Ucits III fund, enabling it to potentially make profits in both up and down markets. It is called SVM UK absolute alpha. Experience is an attribute missing from many fund managers today but McLean has 35 years of investment under his belt. He has also managed a hedge fund quite successfully since 1992.
The fund will invest mainly in the UK stockmarket, with a bias towards bigger companies. Its aim is to capture most (but not all) of the market’s return during bull markets and then to protect investors’ assets and limit their losses during bear markets. Many people think that is what fund managers do anyway but, in fact, most fund managers have to be fully invested in the market at all times, hence why they cannot do much to protect their fund from market falls.
McLean will seek out attractive shares in companies that are seeing earnings’ upgrades or that have positive profit expectations. When searching for shares to short, the emphasis is on spotting firms with flawed business models. On average, across a market cycle, SVM expects the fund to be about 50 per cent long and 50 per cent short but at any given time the exposure could look very different to this.
Managing this type of fund is no easy task and requires experience and a huge amount of attention. Some luck also helps. The fund is relatively aggressive for an absolute return fund and should sit at the higher-risk end of the sector. McLean’s existing fund has been significantly short of the market for the last 12-18 months which in itself has been a tremendous call but fund managers simply cannot get these calls right all the time.
The aim of the fund is to beat cash over a year and beat the FTSE All Share index over a full market cycle. This is no easy task but for those investors who want to hedge their bets, this fund may well be the solution. The only thing that I do not like about the fund is its performance fee. I never find these particularly helpful or transparent. Indeed, with Libor rates so low at present, the fund does not have much of a hurdle to overcome before it can start charging the fee.
This has not put me off adding the fund to our Wealth 150 list of favourite funds but it is something that investors need to be aware of. I would not blame anyone for being put off by the performance fee but despite this extra charge I believe the fund will do a good job for investors over the long term.
Mark Dampier is head of research at Hargreaves Lansdown