Hedge funds accessibility is no longer just the preserve of the Australasian rich

By Neville Bennett

Friday 14th December 2001

Hedge funds are the fastest-growing sector of financial markets. There are about 8000 worldwide, managing at least $US500 billion.

Investors who are pessimistic about positive returns on stock markets are turning to them so they can profit from falling as well as rising markets.

The Australian scene is active, with a new offering appearing every week. Fund managers are recommending exposure to them to attract money chary of volatile stock markets. The trend is interesting, for it reveals a great development in financial instruments. Previously, hedge funds have been the preserve of the rich.

The classic funds often claim to return around 30% a year. This means they are able to impose stiff terms on their clients. There is usually a high minimum investment, say $US100,000, which is tied for a minimum period, say three-to-five years.

There will be an annual management fee of around 1%, and a performance fee of 15% of profits.

Investors are not encouraged to contact their manager but do get a brief monthly statement of the value of their holdings.

Classic hedge funds are thriving because there is a shortage of managers with a good track record.

Their level of profitability, and the demand of retail customers, have encouraged other funds to offer retail funds.

In Australia, Deutsche Asset Management, Rothschild, Macquarie, Ord Minnett and William Mercer are among those to have devised new products.

There is considerable variety in what funds do with their resources.

One type buys or sells short assets such as commodities, stocks or bonds. Another type profits fixed interest assets, another exploits anomalies in prices between assets.

The risk taken varies too: some funds do not use leverage, but other funds trade on the margin.

The giant Long Term Capital Management Fund was sufficiently leveraged to menace the world system in 1997.

Many advisers now encourage their clients to devote about 10% of their portfolio to hedge funds. This may or may not be good advice.

But, by way of illustration, my family has an investment in an Ord Minnett Fund.

A $A1 share bought in July, 1999, is now worth $A1.43c, close to the 20% yield the fund targeted.

There are other advantages of this retail investment: the original capital investment is guaranteed by Westpac and a proportion of the profits are also guaranteed.

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