Hedge fund vehicles losing ground

Listed fund of hedge funds, which aim to give investors a positive return in all market conditions, are continuing their fall from grace among private investors.

Private client wealth managers are still shunning the vehicles, while analysts say that investors have far fewer decent funds to pick from in the sector.

Listed fund of hedge funds are similar to open-ended absolute return funds in that they aim to make a return in all market conditions. However, many of the vehicles have failed to do so in recent years.

Most fund of hedge funds were launched before the credit crunch in 2006 and 2007, promising investors cash-plus returns. But the market downturn sent the share prices of many fund of hedge funds plummeting, as investors demanded their money back from the mainstream hedge funds in which the listed vehicles invested.

Since then, a number of listed hedge funds including Gottex Market Neutral Trust, HSBC Global Absolute and MW Tops have announced plans to wind up. Last year, some investors in fund of hedge funds saw an uplift in the value of their investment as discounts narrowed along with the stock market. However, analysts have been disappointed with their performance this year. Numis Securities points out that most failed to protect capital when markets were volatile in May.

“Poor trading liquidity, discount volatility and
high fees have now put many investors off listed hedge funds altogether,” say Numis analysts in
a recent research note.

“We believe survivors will need to demonstrate the ability to deliver superior performance and lower correlation of returns in order to justify a closed-end structure.”

Analysts say that most of the demand for fund of hedge funds is now focused on single manager vehicles such as BlueCrest AllBlue, which recently raised £350m from investors, as well as BH Macro and BH Global.

Analysts also predict
further closures of some
of the remaining listed hedge funds this year.
This could offer an opportunity for investors to buy
the shares now at a discount then wait for their cash to be returned at net asset value. Stephen Peters, analyst at Charles Stanley, believes that FRM Credit Alpha, which faces a continuation vote at the end of the year and is trading on
a 24 per cent discount, could be one to watch.

But some private client wealth managers who got their fingers burnt with fund of hedge funds during the market crash are still waiting on the sidelines. The vehicles disappointed investors in 2008 when their share prices fell along with falls in the stock market.

Ben Gutteridge, analyst at Brewin Dolphin, says that fund of hedge funds are still too highly correlated to equities.

“I think we’ll have to see another bear market where they actually perform before we think about using them again,” he says.

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