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News Bulletin : ADA News Bulletin September 2010
30 SEPTEMBER 2010 investment insight STRUCTURED HEDGE FUND PRODUCTS Structured hedge fund products provide access to single strategy, multi-strategy or fund of hedge fund investments, with additional benefits. Structured hedge fund products are usually closed end offerings. This means they are open to investors for a short time only, and once closed, run for a set period, which may be as little as five years or as much as 12 years. Some additional benefits that structured hedge fund products may offer are: • Capital protection or capital 'guarantee'; • Currency hedging; • Regular distributions; and • Optional leverage. These benefits often mean that structured hedge fund products provide a degree of comfort required by some first-time investors. HEDGE FUND STRATEGIES There are a wide range of hedge fund strategies that can be employed by managers. Some examples of these strategies are: • Long/Short Equities • Equity Market Neutral • Arbitrage • Event Driven • Global Macro • Managed Futures (Commodity Trading Advisers) Given the choice of strategies available the 'right' investment will depend on a range of factors which may include: • Other investments in your portfolio; • Appetite for risk; • Requirements for income or growth; • Requirement to access your funds at short notice; • Time horizon for investments to perform; and • Available capital to invest now, and in the future. If you are evaluating an investment opportunity with these considerations in mind it should help you to decide which, if any, hedge fund investment suits your particular circumstances. HOW MUCH OF MY PORTFOLIO SHOULD I ALLOCATE TO ALTERNATIVE INVESTMENT STRATEGIES? There are no widely accepted rules to determine a percentage amount to allocate to hedge funds. It will depend on the composition of your existing portfolio and your individual circumstances. Questions to consider include: • Which asset class am I allocating to? • Which asset class am I allocating from? • What other investments do I have in that asset class? • Is the investment adding or reducing portfolio risk? • How diversified is the investment? If you decide that hedge funds are part of the alternative asset allocation, then you should also take into consideration what percentage these funds will occupy. You may be able to access your desired hedge fund exposure through a single investment. If you are considering single strategy managers, you may decide that several different investments are warranted to access the desired strategy mix. If you are allocating to a single manager displaying high risk and high return characteristics, you may wish to start with a relatively small allocation. If the proposed investment is being chosen to enhance the risk-adjusted returns of your overall portfolio, this may justify a higher allocation. For Australian investors, the average suggested hedge fund style investment portfolio allocations range from 10 to 20% of your total investments. FEE CONSIDERATIONS As always, I encourage investors to consider the fees associated with any investment as ultimately they come off of your total return. Hedge fund managers require specialized skills and offer exposure to non-traditional investment strategies. As such the hedge fund industry has established a different fee structure to the traditional funds management industry. Hedge fund managers tend to charge an annual base management fee of approximately 1 to 2% per annum. Frequently, they also charge a performance fee. Performance fee calculations vary, but usually it is around 15 to 20% of the fund's performance above a certain target (known as a 'hurdle') or with no hurdle. As the name suggests, the manager is only entitled to the performance fee when the fund outperforms. Managers usually implement a 'high-water mark' for calculating the performance fee which ensures the manager is not able to charge performance fees on profits that are simply making good previous losses. CONCLUSION Absolute return funds can be a valuable addition to your portfolio in times or volatility or market uncertainty. Investors who have limited themselves to traditional asset classes (shares bonds and property) have experienced extreme volatility in their portfolios during the global financial crisis. If you would like to learn more about hedge fund strategies and the products available please feel free to contact me. My contact details appear below. Michael Lannon is the Managing Director of 2020 DIRECTINVEST, an ADA Partner Service specializing in the provision of execution only DIY investment services. Contact: email@example.com or call 1800 352 021 Visit: www.2020directinvest.com.au Parts of this article have been sourced from material produced by Macquarie Group Limited. Macquarie Group Limited has neither authorised nor issued this article. This article has been prepared without taking account of your objectives, financial situation or needs; and because of that, you should consider the appropriateness of the advice, having regard to the client's objectives, financial situation and needs. "Hedge Fund managers require specialized skills and offer exposure to non-traditional investment strategies."
ADA News Bulletin August 2010
ADA News Bulletin October 2010