Hedging your bets is all about style

Hedge funds may have become an accepted part of the investment landscape for financial planners, but advisers still have the difficult task of picking the right style of fund for their clients, particularly as returns on the Australian stock market have started to diminish.

Pengana Capital managing director of hedge funds Damien Hatfield says planners are starting to include hedge funds in portfolios and the number including hedge fund managers on approved lists is “going the right way”.

“A hedge fund manager is a specialist manager and can also be a boutique fund manager,” he says.

“Planners are attracted to boutique managers, but they also want specialists and we are seeing them change their fixed interest spread to include some long/short exposure in the portfolio.”

However, there are now traditional fund managers also including hedge fund principles, such as long/short selling in their mix of products.

Hatfield says managers such as PM Capital, with its long/short style, are being included in equity spreads.

However, he admits the strong Australian equity performance has cast a shadow over equity hedge fund managers.

He believes the recent downturn should see advisers moving back to absolute style managers to maintain returns.

“People are looking back towards the hedge fund sector and we are seeing stronger flows back to the larger fund-of-funds products,” he says.

Select Asset Management investment specialist Robert Graham-Smith says his company has witnessed strong inflows from the retail area during the past 12 months.

“The biggest question is whether advisers are focusing on hedge funds because the equity market is running so strongly,” he says.

“With the recent downturn, the focus has moved to absolute funds.”

While some advisers are including hedge funds in their portfolios, Graham-Smith says getting some advisers to understand the role of hedge funds is very difficult.

“There are still question marks for some advisers as to whether they understand the diverse investment strategy of a fund-of-funds,” he says.

“Diversification is there for protection and sometimes it is difficult to explain the concept.”

Graham-Smith says some advisers have started using hedge funds as a core manager rather than to smooth out returns.

“We tell advisers about portfolio diversification and explain why they shouldn’t make a hedge fund the core product,” he says.

“While the hedge fund may deliver exceptional performance sometimes, they risk losing their investors’ capital when the fund swings the other way.”

Graham-Smith says advisers should look for funds that show consistent performance and not just chase returns.

“Some people may think hedge funds have given a disappointing performance in the past 12 months compared to the stockmarket, but they are forgetting the risk-adjusted return by the hedge fund,” he says.

Select’s market-neutral fund has been averaging 10 per cent returns, although that has been overshadowed by the stock market during the past 12 months.

EQT Funds Management chief investment officer Harvey Kalman says investors are prepared to pay retail and platform fees to go into hedge funds and that shows the growing interest in the sector.

“People are feeling more comfortable with hedge funds and are willing to pay a platform fee in addition to access a particular fund,” he says.

“All our externally managed hedge funds have positive retail inflows and they are heading in the right direction.”

Kalman says another reason why people are moving to hedge funds is because they like the direct control managers have over the direction of the fund. Larger fund managers have a bureaucratic structure and “people don’t like benchmark traders”, he says.