Facing this difficult market environment, investors were tempted to look at absolute return funds and hedge funds. While many investors opted for open-ended absolute return funds, the investment trust universe should not be overlooked as it contains several funds of hedge funds with impressive performance and access to well known managers.
Last year, the FE Absolute Return sector broadly succeeded in protecting investors’ capital with an average return of -0.94%.
Four-way dominance
Just four funds (Standard Life Global Absolute Return Strategies, Newton Real Return, Ruffer Absolute Return and Blackrock UK Absolute Alpha) accounted for 75% of all assets in the sector at the end of 2011. Although they underperformed their peers in 2011 with an average performance of -2.51%, these funds have consistently outperformed their rivals over longer time periods. Due to their good past performance and size, these four funds have become investor favourites.
In contrast, closed-ended absolute return funds in the AIC IT Hedge Fund sector performed better than their unit trust peers in 2011. On average the sector returned 1.44%. Nevertheless the investment trusts underperformed their open-ended rivals over the long term. This was most notably the case in 2008 when the sector returned -37.53% (against 1.10% for FE’s UT Absolute Return sector). This poor performance is partly explained by the discount effect that impacted the investment trust universe in 2008. Indeed hedge funds often invest in illiquid instruments or do not disclose their Net Asset Value, which can have a negative effect on discounts.
Three trusts stand out, which have not only succeeded in consistently outperforming their peers but are also the most popular and largest funds in the AIC IT Hedge Fund sector: BlueCrest AllBlue, Brevan Howard Macro and Brevan Howard Global.
They are fettered funds of hedge funds and give smaller investors the chance to participate in Brevan Howard and BlueCrest’s success stories without having to buy them directly. In addition to providing broad exposure to the hedge fund industry and its uncorrelated performance, funds of hedge funds also add security to the sometimes obscure alternative fund universe as they diversify the risks associated with a single investment fund.
IT superiority
These three trusts have consistently outperformed their peers and benchmarks. Over the past 36 months, they have returned an average performance of 20.66% against 6.26% for the largest absolute return funds. They achieved higher returns by adopting a riskier approach – their annualized volatility over the past three years was 14.94% against 7.69% for their rivals.
The Brevan Howard Macro and Brevan Howard Global also had better Sharpe ratios than the four most popular unit trusts. That is not the case for the BlueCrest fund, particularly over the past 12 months.
The FE Risk Score confirms that BlueCrest and Brevan Howard managers have adopted a riskier approach. FE Risk Scores define risk as a measure of volatility relative to the FTSE 100 Index. According to that measure, the BH Macro fund is the riskiest fund in our fund selection but remains less volatile than the FTSE 100. On the contrary the Blackrock UK Absolute Alpha fund has the lowest risk score, as its volatility over the past 12 and 36 months would have suggested.
When contemplating an investment into alternative strategies, retail investors seem to be narrowly focussing on four unit trust absolute return funds. Investors and their IFAs would be better served by considering investment trusts, particularly BlueCrest AllBlue, Brevan Howard Macro and Brevan Howard Global.
Not only did they outperform their peers and benchmarks, but these three funds also offer retail investors the cheapest access to the best hedge fund managers.
