Indeed, some we have recently seen are happy to receive hefty management fees from investors for the privilege of receiving their services, but are failing to offer much in the way of performance.
We have heard two very well regarded managers complain to us in meetings that in the absence of equity markets going up for a consistent period of time, they will struggle to achieve positive absolute returns in their funds.
This sounds like they want me to pay performance fees for receiving equity market beta. That is a bad deal for investors and not one we wish to take.
Unlike traditional long-only managers and groups that come to running hedge funds as an adjunct to their normal funds, listed hedge funds such as those run by Brevan Howard or BlueCrest are managed by long-term hedge fund specialists. And in both cases, they deliver returns from a portfolio of non-equity trades.
And while you do not escape from paying hedge fund level fees, you can buy these funds at discounts to their NAV, so giving the possibility of enhancing your returns. While other listed hedge funds are available, and many offer wider discounts due to them perhaps being wound up and cash returned to investors, we think in this sector big is best.
The biggest and most well known fund is BH Macro. It owns the Brevan Howard Master Fund, the company’s flagship product and the listed fund trades over £1m per day. It aims to protect and increase its value from a series of trades in fixed interest and currency markets.
The management group places a great deal of emphasis on optionality – placing trades where they can only lose the value of the option premium if they are wrong, but enjoy greater upside if they are right. It trades at a small discount to its asset value.
BH Global, a fund of Brevan Howard funds trades at a far wider 10% discount, with around half its assets in the Master fund. Other investments are made to the likes of specialist credit trading and emerging market fixed income funds.
BlueCrest AllBlue is similar to BH Global in that it is a fund of managed funds, in this case run by BlueCrest itself. Its main strategy is Capital International, which is also focused on trading developed market interest rates and makes up about 40% of the total value of AllBlue.
Other investments by the fund are into BlueTrend, the firm’s trend-following product, the trade finance fund Mercantile, and a relative value credit-trading fund. It trades on a near 6% discount to NAV but with good 2012 performance and few liquidity issues.
Typically, correlations between the fund and equity markets are low or even negative, so offering true diversification across portfolios. In 2011, BH Macro performed exceptionally well in the second half of the year as equity markets worldwide struggled over European economic concerns.
We see them as ideal candidates for the core component of a diversified portfolio, around which investors can take greater risk through their preferred equity or bond investments. They are big and liquid enough to be considered instead of open ended funds, and are different to and better than open ended alternative choices. Most importantly, investors can be sure that if they are charged performance fees, they are doing so for true absolute returns and in a fund that does not seek to charge performance fees for providing equity market ‘beta’.
