Getting a piece of the portfolio pie

The use of hedge funds by financial planners is slowly growing. In many cases, it is only planners who have reached a certain level of competence that are allowed to use these products by their dealer groups.

AXA national manager technical research Robert Thomas says only accredited advisers are allowed to use hedge funds among its dealer groups, and then only up to 10 per cent of the portfolio.

“The first criteria for planners using hedge funds is that they work from an approved list and accreditation, which means they have to have certain skill sets,” he says.

“Using hedge funds is not mainstream yet as the type of advisers using these products is an experienced, competent user of multi-manager funds.”

Thomas says hedge funds are more likely to be used by planners who want more control over the portfolio and the ability to make investment decisions, rather than using the model portfolios that AXA offers.

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“Our advisers don’t just use hedge funds because they are there, some use them to differentiate themselves from other advisers,” he says.

“Other advisers are using it as part of an aggressive model portfolio, which includes some hedge fund use.”

Use of hedge funds also depends on the comfort level of the advisers using such technical products. Thomas says two of the fund-of-funds AXA uses — HFA and Deutsche — offer good adviser education.

Perth-based Godfrey Pembroke senior consultant Chris Craggs uses long/short hedge fund managers, but doesn’t use fund-of-funds products.

“I am very selective as to which funds I use and only for a proportion of a portfolio,” he says.

“My approach is to have a core solution which is a significant part of the index and then use a hedge fund to enhance the returns.

“What you expect is for a manager such as Platinum to hedge that part of an international allocation and then for it to use a long/short approach,” he says.

“On equities, a hedge fund can outperform direct stocks and I am happy using this long/short approach.”

Craggs admits that with the Australian equity market running so hot, it is difficult for hedge funds to arbitrage a position to get stronger returns.

His allocation to hedge funds in a portfolio varies depending on the position he wishes to take to achieve the client’s goals.

This can vary from using Platinum and allocating between 10 and 15 per cent of a portfolio with that manager using the long/short strategy to enhance returns.

In another case, using a different boutique manager, he may use up to 40 per cent in an aggressive investment strategy, but again using a long/short management style.

AXA uses Mercer for qualitative research into products and from that short list the internal research team decides what goes on the approved list.

Advisers use mainly fund-of-funds hedge funds, although Thomas says some single managers, such as Platinum and Portfolio Partners, which have short sell investment strategies, are included on the approved list.

“We use hedge funds to smooth the client’s returns rather than enhance,” he says.

“Our use of up to 10 per cent of the portfolio is probably higher than other dealer groups allocation to hedge funds.”

But despite the growing use of hedge funds, some advisers still won’t allow them onto the approved list.

Hood Sweeney Securities director Matthew Rowe admits he doesn’t understand hedge funds so will not allow them onto the approved lists at the practice.

“I can’t put clients into something I don’t understand,” he says.

“I also have a problem with the liquidity and the fact you can wait up to six months to get your money out.”

However, the use of boutique hedge fund managers is growing as their performance has demonstrated they have a role to play in many portfolios.

The next step is to persuade more advisers to include them next time they build a client’s investment portfolio.