HEDGE funds are not new, but the out-performance of short- selling strategies, in particular, in the last few years has focused attention on the industry. And the cry to make hedge funds available toretail investors is getting louder.
This week RSM Robsin Rhodes, an accounting and consulting firm, and Intrinsic Asset Management, which operates a Dublin-based fund of hedge funds published a rebuttal to the Financial Services Authority’s decision not to allow hedge funds to be sold to retail investors.
There is one good reason why hedge funds have remained the preserve of the ultra-rich until now. While they can, and have, made serious money for investors, they can lose it just as fast. Even the ultra-rich are advised not to put more than 10 per cent of their total net wealth into hedge funds.
Van Hedge, a US monitoring group tracks, 14 types of hedge fund strategy – but there are many more. And as George Van, chairman of Van Hedge. says: “Hedge funds are as varied as animals in the African jungle.”
Van points out that any one strategy can be a disaster waiting to happen if market conditions change – leaving investors seriously less well off as a result. He firmly believes that the overwhelming majority of investors are simply not capable of deciding between distressed securities and market neutral arbitrage hedge funds. “My honest answer is use a professional.”
Van advocates using a fund of hedge funds as strategies will have been chosen by experienced professionals and combined in the appropriate proportions.
“Creating an optimum grouping of hedge funds requires an in- depth insight into the potential of each hedge fund strategy in differing market conditions,” said Van.
In declining to allow retail hedge funds, the FSA expressed concerns that investors lacked sufficient knowledge to understand what they were investing in and also that hedge fund fee structures did not lend themselves to the retail market.
RSM’s report attempts to address the FSA’s concerns. Its author, Dr Oonagh McDonald, has created what she believes is a workable framework to ensure the safe selling of fund of hedge fund products. In particular, she stresses that the traditional 10 per cent cap be maintained for retail investors. Although it is difficult to see how this could be enforced in practice, even if as McDonald suggests the products are only sold through intermediaries and a client risk audit is carried out.
It is clear the retail hedge funds issue is not going to go away as the investment industry looks for new ways to tempt investors into parting with hard-earned cash. Industry lobbying has seen the introduction of a fund of hedge funds in Switzerland, Ireland, France and Germany.
But if hedge funds are not to follow split-caps and precipice bonds into the financial product “Hall of Shame”, a massive education programme for advisers must precede their introduction.
