Sophisticated investors see potential for returns from hedge funds

Date: Wednesday, October 8, 2008
Author: Easier.com Finance

When considering investing in hedge funds a poll of 1,300 sophisticated private investors showed that 15% believed that hedge funds offer the potential for strong returns in the current environment. However they are also concerned about their perceived lack of transparency (17%) and riskiness (17%) according to the recent survey, conducted by Association of Investment Companies (AIC).

Investors are also cautious about hedge funds because they believe that they are not regulated (14%), and are concerned about the reputation for high charges (12%). Some investors also find them confusing (11%) and believe they are only accessible to the wealthy (5%).

How many are investing in hedge funds?

Although some sophisticated private investors are wary of hedge funds, 6% of those surveyed are already investing in hedge funds, 5% have invested in the past and 3% are planning to invest in the future. Interestingly, nearly half (46%) of investors believe they may possibly invest in hedge funds in the future whilst only 29% of investors surveyed would never invest in hedge funds.

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC) said: "Many of these investors' concerns over hedge funds are addressed through the listed hedge fund and fund of hedge funds sectors. The listed structure of closed ended hedge funds and fund 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 fund of funds can enhance the diversity of your portfolio. There are some single strategy hedge funds in this sector, most are fund of hedge funds which 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% 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 BH Macro, said: "Hedge funds who 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 go with stock exchange listing."

Robin Bowie, Chairman of Dexion Capital, said: "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 capital', 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."