finding gold in hedge fund strategies

Sanlam Private Investments' James Mercier, says Ucits-compliant hedge funds should be given a chance and not tarred with the same brush as the Madoff brigade.

finding gold in hedge fund strategies


As ever, the press surrounding hedge funds is rarely positive. They continue to be thought of as secretive, illiquid, unregulated institutions, that engage in questionable practices. 

Their reputation was tarnished further after it came to light prominent hedge fund manager Bernard Madoff was running a giant Ponzi scheme; and more recently, SAC Capital founder Steve Cohen is being investigated by US regulators for insider trading at his firm. The old adage ‘all that glitters is not gold’ rings true, but we feel gold can still be found.

Despite all this, hedge fund investment strategies are becoming more and more accessible, and popular, to the retail investor. Promises of large, positive, uncorrelated returns, with low volatility, once viewed as an unobtainable holy grail to the man on the street, are today more of a reality than most are aware.

The Ucits rules now allow far more flexibility in what the FCA deem as appropriate types of investment instruments retail fund managers are allowed to use. To that end, hedge fund managers are now able to replicate the majority of the trades they undertake in their unregulated, offshore, Cayman-listed funds in regulated, onshore vehicles with daily liquidity.

First class

One such collective investment scheme available to private client investors shows how it is possible to get access to a hedge fund strategy which, thus far, has provided positive, uncorrelated returns in any market environment, with lower volatility than the market.

The investment trust in question, which invests directly in the ordinary shares of Brevan Howard’s Master Fund (an offshore hedge fund which operates a macro investment strategy) has returned roughly 12% on an annualised basis since its inception in 2007, with an annualised volatility over the same period of around 7%.

This compares with an annualised return from the MSCI World Index, over the same period, of about 7% and a volatility of approximately 16%. More impressive is that the trust has demonstrated a correlation of minus 0.2 over the last five year period when compared to the MSCI World Index.

Now this does not mean we should all pile into Ucits, or listed hedge fund strategies willy nilly, far from it. Thorough due diligence remains crucial to understand the process the manager employs, their overall style and how they aim to achieve the targets they have set themselves. Most importantly, a systematic understanding of the risk limits and restrictions employed is paramount to knowing how the manager aims to avoid losses, keep volatility low and maximise returns when using more esoteric investment instruments and strategies. 

The right hedge fund strategies are a good way to diversify one’s portfolio and improve one’s risk-adjusted returns. Here at SPI we recognise that not every cloud brings rain but hard work and exhaustive due diligence must be undertaken to ensure we avoid the storm.



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