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Boom time for the poor man's hedge funds as small investors flock to new-style trusts

Date: Monday, July 27, 2009
Author: Jeff Prestridge, MailOnline.co

Stock market euphoria returned last week with the FTSE 100 index of the country's leading companies recording its longest sustained bull run for five-and-a-half years. The last time the index recorded consecutive growth over ten days was at the start of 2004.

But many private investors - and market analysts - remain unsure as to whether the recent recovery can be sustained.

Such nervousness explains why many are shunning traditional equity-only investment funds in favour of vehicles that aim to deliver positive returns in all stock market conditions.

Sales of these new-style funds, commonly known as absolute return funds, accounted for more than a third of sales of unit trusts to individual investors last year, with only corporate bond funds proving more popular. And continuing appetite for such defensive funds has prompted leading investment houses to get in on the act by launching their own versions.

In recent weeks, Liontrust has launched the European Absolute Return fund, which aims to deliver positive returns regardless of any major downturn in European stock markets.

In September, investment bank Cazenove will launch its second absolute return fund - Cazenove Absolute UK Dynamic - aiming for an annual return of more than ten per cent. Already this year, Gartmore, Ignis (formed from the merged Resolution and Axial) and SVM Asset Management have created new absolute return funds.

'They're a welcome development,' says Mark Dampier, of independent financial adviser Hargreaves Lansdown in Bristol.

'Over the past ten years, too many investors have accumulated wealth in investment funds only to see it disappear before their very eyes as markets tumble. It happened last year and it could well happen again. The beauty of these

new funds is that small investors have a chance to earn half-decent returns irrespective of whether markets are in freefall or on the bounce --an opportunity that until recently was only available to high net worth individuals through hedge funds with prohibitively high minimum investment levels.


'Indeed, many of the investment managers now running absolute return funds are the same people who have been running successful hedge funds for years.'

Among them, says Dampier, are Gartmore's Roger Guy, manager of Gartmore European Absolute Return and long-standing manager of successful hedge fund AlphaGen Capella Hedge, and Neil Pegrum, manager of the soon to be launched Cazenove fund. Pegrum's hedge fund, called Cazenove UK Dynamic Absolute Returns, has delivered positive returns in every calendar year since its launch in June 2005.

Like hedge funds, what distinguishes absolute return funds from traditional investment funds is that they are not just dependent on rising share prices to generate returns. They can also make money when prices fall by 'shorting' the market.

They do this by selling shares that they have borrowed in the expectation of buying them back at a lower price and pocketing the profit on return of the shares. In last year's banking crisis, many leading hedge fund managers, including Crispin Odey of Odey Asset Management, made millions of pounds from shorting the shares of leading banks, most notably Bradford & Bingley, before it was put into public ownership.

In May this year, Odey launched the CF Odey UK Absolute Return fund. Its price is up by more than eight per cent. Most absolute funds run flexible portfolios, which means they can be shorting shares they believe will fall, as well as holding shares they think will rise. Some also invest up to 40 per cent in cash. The result is that overall they under-perform when stock markets are rising but crucially generate positive returns when markets fall.

Although most absolute return funds are still relatively young, some have built up three-year records. Among those that have established creditable performances are Black-Rock UK Absolute Alpha (up 28 per cent), Baring Absolute Return Global Bond (up 21.2 per cent), Newton Real Return (up 14.3 per cent) and Threadneedle Absolute Return Bond (up 25.4 per cent). Not all absolute return funds have delivered. Over the past year, funds run by Marlborough, Skandia and Swip (part of Lloyds Banking Group) have failed to produce positive returns.

Darius McDermott, managing director of independent adviser Chelsea Financial Services in west London, says: 'Absolute return funds can make a great core investment holding.

'But just because it has the word "absolute" in its name doesn't mean that it will produce positive returns.

'The key is to select a fund where the underlying manager has a record of delivering absolute returns.'

I don'twant to lose any more hard-earned cash

Like many investors, part-time model Natalie Wong is a recent convert to absolute return funds. Her reason for choosing them is simple - she is fed up with seeing her hard-earned savings hit by crashing stock markets.

'I don't want to lose any more money,' she says. 'My savings are too precious. The absolute return funds I am now investing in provide me with a comfort factor I haven't enjoyed before.'

Natalie, 26, who is single and lives in Maida Vale, west London, has been putting away 250 a month into an Isa for the past three years - ever since she started modelling part time to fund her way through a law degree at London Metropolitan University. She is hoping to become a lawyer.

When she first took out an Isa, she mixed her investments between UK funds such as Aviva Blue Chip Tracking --which mirrors the performance of the FTSE 100 index - and more adventurous trusts such as BlackRock Gold & General, First State Asia Pacific Leaders and Allianz Bric Stars, which respectively invest in gold, mining and related shares, top Far Eastern companies and the fast growing economies of Brazil, Russia, India and China.

Last year, after her holdings fell sharply in value, she changed tack and invested new contributions into two absolute return funds - Threadneedle Absolute Return Bond and BlackRock UK Absolute Alpha.

Both funds have missed out on the strong market bounce, which has seen the FTSE 100 rally more than 20 per cent since its low this year in early March. But they have made steady returns, which is enough to keep Natalie happy. 'I'm more comfortable with these funds,' she says. In the past six months, the BlackRock fund has risen 5.5 per cent while Threadneedle has gone up 2.3 per cent.

These are two of the four funds recommended by Darius McDermott of financial adviser Chelsea Financial Services, with whom Natalie set up her Isa. The other two are Cazenove UK Absolute Return and Gartmore UK Absolute Return.