SRI and hedge funds get cool reception

Last year, hedge funds and ethical funds were regarded as A-list investments.

In 2000 alone, Australian fund managers rolled out more than 10 hedge funds, and more than eight ethical or socially responsible investments (SRIs) between them.

However, despite the number of products now available, interest from retail investors is less enthusiastic than the spate of launches would have us believe.

In the case of hedge funds, some might say there is little investor interest because they can be an unexciting, low risk investment. Further, reluctance may be because investors do not understand the strategies used in hedge funds.

It is a view that finds some agreement with those involved with the products themselves, such as Colonial First State head of hedge funds, Damien Hatfield.

“In my view, hedge funds are a bit unknown. They are so new, and there is only one fund-of-fund that has a two-year track record, and that’s Deutsche. People such as ourselves, Rothschild and AXA have released a fund, however, the industry is so new, it’s going to take a while for it to be accepted by individual investors,” he says.

According to Hatfield, there are a lot of misconceptions in the marketplace about what hedge funds are.

Despite this, Hatfield says interest in hedge funds is still strong, as investors and critics start to look at the performance of the products on offer. Colonial’s own hedge fund recorded an astounding $17 million worth of fund inflows in the first three months of operation, of which 63 per cent or $11 million came from retail investors and the other $6 million from wholesale.

Hedge Funds of Australia (HFA) managing director Spencer Young agrees that hedge funds are misunderstood by investors.

“Due to the widely published failure and success of various hedge funds, it has been perceived by the public that this is the way that all hedge funds are,” he says.

Young says it is quite natural for investors to shy away from an investment class they don’t understand. He says it is also common for investors not to jump at medium-return low risk investments, as they are typically classified as boring. However, low risk investments do have their advantages.

Using the events of September 11 last year as an example, Young says one of the key benefits of hedge funds is that while many Australian and international fund managers experienced significant losses, HFA’s hedge funds traded through the period and recorded a less than one per cent fall in returns.

He says there are particular points investors should look out for to further educate themselves on the benefits of hedge funds.

Financial planners should assess the risk profile of the investor to ascertain which fund better suits their client needs, while investors need to spend some time understanding what all the different hedge funds offer. Young recommends uncertain investors avoid macro funds, even though they can be highly profitable, they are also high risk.

SRIs are receiving a similar greeting from investors and, like hedge funds, SRI funds and ethical product offerings have flooded the market. However, this seems to be of little interest to many investors, as they are starting to query the true ethical nature of the investment.

Independent investment firm, Stellar Capital, has concentrated its research on the Australian SRI market, with the findings of its first major Australian SRI study to be released later this year.

“Our report assessed the merits of SRI products. We found that most had clear investment objectives but their definitions of ‘ethical standards’ varied,” Stellar Capital principal Martin Gold says.

“Like most things, we don’t see investors paying a premium management fee if the funds are using a simple stock selection overlay,” he says.

“SRI is not new and is here to stay. Increasingly, it is likely to be viewed as a mainstream investment.”

According to AMP Australia’s head of socially responsible funds Michael Anderson, socially responsible investments are always growing in popularity.

“We’ve seen a doubling in their growth rate [compared to] our conventional funds,” he says.

However, Anderson also acknowledges that many investors are put off by the saturation of the SRI market and also concerned about which SRI fund to choose.