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News Bulletin : ADA News Bulletin September 2010
28 SEPTEMBER 2010 Last month's article highlighted the fact that investors earning incomes above $250,000 per annum qualify as sophisticated investors, allowing them to access investment opportunities that aren't available to the average 'mom and pop' investors. Following on from that theme, this month I will focus on alternate investment products such as hedge funds, also known as absolute return funds, and explain how allocating assets to these products can lower the overall risk in your portfolio and reduce portfolio volatility. WHAT ARE HEDGE FUNDS OR ABSOLUTE RETURN FUNDS? Hedge funds are also known as absolute return funds -- they aim to generate positive returns regardless of the performance of the overall market. The term 'hedge fund' is used broadly to describe managed funds that use a wider range of investment strategies or financial instruments than a traditional fund manager to generate returns. The aim of the hedge fund manager is to produce positive returns in both rising and falling markets. A traditional equity fund manager aims to make a return 'relative' to an industry index or benchmark, such as the S&P/ASX 200 (the broad index used to measure the performance of the Australian share market). This means that the fund's return may be negative if the benchmark generates a negative return. For example, if the index is down 15% the managed fund is only down 10%, the managed fund has outperformed the index by 5% in relative terms and the fund manager considers that performance a success. On the other hand the investor still lost 10% and will not be happy. Conversely, a hedge fund manager aims to deliver a total or 'absolute' return irrespective of whether the market is up or down. This quality inherent in hedge funds has led to the term 'absolute return fund' becoming synonymous with the term 'hedge fund'. The term 'hedge' generally describes the strategy of protecting one investment by taking a position in another investment that is expected to act in a different, or even opposing, way. Hedge fund managers often make a core investment and then enter several other trades to remove specific risks that are not part of their core investment idea. Removing overall market risk is a common aim of this technique. Compiled by Michael Lannon TO REDUCE PORTFOLIO RISK Using alternate investment strategies investment insight www.2020directinvest.com.au/ada | 1800 352 021 100% entry fee rebate on managed funds
ADA News Bulletin August 2010
ADA News Bulletin October 2010