Wealth managers dip tentative toe in hedge fund waters

Wealth managers seeking a more stable home for their clients’ assets, as equity markets remain volatile, have been recommending London-listed hedge funds – which aim to make money in all market conditions and protect against losses.

In the past month, a number of hedge funds have produced positive returns in spite of heavy falls in global equity markets. BH Macro, a single-manager listed hedge fund, was up 7.1 per cent in the month to Wednesday, compared with a 13.8 per cent fall in the FTSE World Index over the same period.

“On a select basis, hedge funds fulfil a valuable role within portfolio construction and, over recent weeks, investors in these funds have become blatantly aware of their value,” argues James Maltin, a director at Rathbones, which owns BH Macro and Aspect Diversified Trends, a quant fund, for its clients.

Stonehage, the family office, has between 25 and 30 per cent of its clients’ money in hedge funds.

Ronnie Armist, executive director, prefers “macro” hedge funds that aim to profit from movements in the global economy, rather than taking bets on specific equities.

But he warns that clients can have concerns over the high fees charged by hedge fund managers. Funds of hedge funds have double layers of management fees, while single manager hedge fund will typically also charge a performance fee.

“There are concerns about fees in funds of hedge funds, and one has to be cautious,” admits Armist. “But sometimes you find a very good one you’re happy to put money in,” he says.

He recommends that investors hold a mix of different hedge funds, so they are not reliant on just one team to make the right calls. He also checks the shareholder registers of single hedge funds to find out if funds of hedge funds have invested in them – he warns that this is “hot money” that could be taken out in a hurry if markets fall and investors demand their money back.

Ewan Lovett Turner, an analyst at Numis Securities, says clients have been phoning him this week interested in BH Macro and BH Global due to their performance in August. However, he adds: “It’s still an area where people have been burned in the past, and [investors] are waiting for them to prove themselves in these markets before returning.”

Some wealth managers are still avoiding hedge funds altogether. Many of the vehicles failed to protect investors as much as they might have hoped in the market crash of 2008, falling 20 per cent on average compared with a 40 per cent fall in equities. Tom Becket, chief investment officer at PSigma, thinks that a mixture of equities for growth and cash for protection can serve investors better than investing in a sector that suffers a lack of transparency and liquidity.

But others say the industry has moved on since the last market crash. “I think 2008 certainly cleaned out some of the less astute hedge fund managers – there’s no doubt about it,” says Armist. “Gearing [borrowing to invest] is less dramatic and I think, ultimately, over the medium term, to get capital preservation, hedge funds definitely have a place in a diversified portfolio.”

Some wealth managers are prefer single-manager hedge funds to funds of funds. Kieran Drake at Winterflood Securities argues that it is easier for investors to see what is going on in a single-manager fund. “We had a meeting with a fund of hedge funds and they had to ring round all the different funds they invest in and ask how performance was going in the market turmoil,” he says. “In single manager funds, it is quite transparent.”

But wealth managers agree that it is difficult to pick the best performers.

“The space is full of many poorly performing funds, so it is essential to focus on the best managers in the region,” says Adrian Lowcock at Bestinvest. He likes BH Global and BlueCrest AllBlue, which has returned 71 per cent to investors over five years.

Buying listed funds also offers the opportunity to buy funds when they are looking cheap. Drake suggests buying Dexion Absolute and BlueCrest AllBlue, both of which are trading on avove-average discounts to their net asset values.