Fee-wary investors shun market neutral sector
Market neutral funds have been the best performing sector over the past five years, but high management fees are putting Australian investors off, according to research house Zenith.
Zenith head of alternative investments Daniel Liptak said Australian investors are preoccupied with management expense ratios rather than net-of-fee returns.
The typical management fee for a market neutral fund is between 1.5 per cent and 2 per cent, along with a performance fee, he said.
However, over the past five years, investors got $2.54 back for every dollar they spent on fees in market neutral funds, Liptak said. In contrast, for every dollar spent on an average long-only Australian equities fund investors lost 95 cents, he said.
This means that investors in market neutral funds are fully participating in the excess returns, whereas all of the alpha generated by long-only funds is going to the manager, Liptak said.
Financial advisers need to educate their clients about the benefits of market neutral funds which provide a high risk-adjusted return that is not correlated with the market, Liptak said.
Another reason the take-up of market neutral funds in Australia is low is because "platforms that the financial advisers get their products from are heavily tilted towards long Australian equity managers and the platform provider funds", said Liptak.
However, part of the reason for the superior performance of market neutral funds in Australia is precisely because they are under-exploited here, he said.
"The main hedge funds centres in the world, New York and London, have a lot of market neutral funds - and they also have a lot of demand from institutions and high-net-wealth investors," Liptak said.
"The returns are arbitraged away, and more importantly the quality of managers who have started to take advantage of that demand probably isn't as high," he said.
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