Thu, 09/10/2008 - 07:02
Sophisticated private investor are aware of the potential for high returns offered by hedge funds, especially in the current environment, but are concerned about their perceived lack of transparency and greater riskiness than traditional investments, according to a survey by the UK's Association of Investment Companies.
The poll of 1,300 private investors found that 15 per cent believed that hedge funds offered the potential for strong returns, but 17 per cent expressed concern about their transparency and the same proportion about their risk levels, the AIC says.
Other concerns expressed by investors include the belief that they are not regulated (14 per cent) and their reputation for high charges (12 per cent, while 11 per cent of investors find them confusing and 5 per cent believe they are only accessible to the wealthy.
Despite these concerns, 6 per cent of the investors surveyed are already investing in hedge funds, 5 per cent have invested in the past and 3 per cent are planning to invest in the future. Nearly half (46 per cent) believe they may possibly invest in hedge funds in the future, while only 29 per cent ruled it out completely.
'Many of these investors' concerns over hedge funds are addressed through the listed hedge fund and fund of hedge funds sectors,' says AIC communications director Annabel Brodie-Smith.
'The listed structure of closed-ended hedge funds and funds of funds means investors have access to a much higher level of transparency. Shares in listed funds are available on the stock market just like any other share, so they are available to those of modest means as well as the super-wealthy.
'It's important to have a balanced portfolio, but providing this is in place, listed hedge funds and funds of funds can enhance the diversity of your portfolio. There are some single-strategy hedge funds in this sector, but most are funds of hedge funds that aim to spread the investment risk across a number of hedge funds.
'This is a real growth area of the industry, with the hedge fund sector making up 65 per cent of the assets raised this year in the investment company sector. However, it is still a young sector, so long-term performance records are not available for the majority. Investors need to do their homework to make sure they select the right fund for them in this diverse sector, and if they are unsure, they should take independent financial advice.'
Ian Plenderleith, chairman of Brevan Howard's listed feeder fund BH Macro, says: 'Hedge funds that can maintain the necessary standards of investment expertise and risk management have demonstrated that they can deliver superior returns on a consistent basis.
'Listed hedge fund vehicles give a wider range of investors access to alternative investment strategies through an avenue they are familiar with. They get the benefit of the regulatory safeguards and disclosure obligations, and the secondary market liquidity that goes with stock exchange listing.'
Robin Bowie, chairman of Dexion Capital, adds: 'When dislocation in financial markets reaches the present level, it provides an ideal environment for hedge funds, which are well placed to make opportunistic investments where they recognise value and can hedge out the market risk.
'Some of those positions will be illiquid, which will be unsuitable for most managers of open-ended funds. Closed-ended funds employ permanent capita', raised on the stock exchange, which allow managers to blend liquid and illiquid assets and take advantage of the current mismatch in the markets. In essence, closed-ended funds bring liquidity to illiquid situations.'
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