Hedge funds seek to redress the balance
With the hedge fund industry hitching a ride on the institutional investment bandwagon, wealthy investors are discovering they have been left behind.
In the fund of funds segment, in particular, products are generally aimed squarely at big institutions.
On the one hand, this tends to require more robust processes, risk management and operations. However, the end result may be too sanitised for private investors with tax to pay and inflation to beat.
Some firms are trying to redress the balance. Eddington Capital Management was set up five years ago with the backing of the Cayzer family’s Caledonia Trust to deliver high double-digit returns from portfolios of no more than 25 funds.
“All that was available to high net worth investors was mainstream institutional product, and they wanted something sexier,” said Katie Partridge director of client relations at Eddington. The firm invests with the more volatile, high return managers that many other funds of funds shun. It expects managers to deliver 100% over three years: “But we don’t care how they get there,” said Partridge.
After an underwhelming start, Eddington has performed strongly in the past two years. Thames River also recognised the gap in the market and repackaged its existing Warrier strategy as a closedend, listed fund targeted at wealth managers, Hedge+. Mark Warren, investment director at Thames River, said the daily valuation and liquidity of a listed vehicle attract private client advisers.
A new class of realisation shares has been introduced enabling returns for UK investors to be taxed as capital gains at 18%, rather than as income at 40%. A drawback is that performance of listed funds is inevitably more closely linked to public equity markets than for unlisted products.
Greg Thompson, a director at Cheviot Asset Management, said Hedge+ is one of the listed funds of funds he favours for clients. Others include Dexion Absolute and Tapestry. To access o shore funds managed by Caledon Capital and Liongate he uses listed notes issued by Barclays Capital.
Of the private banks that have set out to distinguish themselves for their hedge fund expertise, HSBC stands out for its size alone. The bulk of the $54bn (€35bn) of hedge fund assets under its supervision are in advisory portfolios tailored for clients with upwards of $20m to invest or discretionary portfolios of $5m.
But its flagship GH fund of funds has a strong record and uses the same research and selection criteria as the discretionary portfolios. Declan Sheehan, chief executive of HSBC Private Bank in the UK, said it has successfully avoided recent blowups thanks to close monitoring of managers’ investment style.
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