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September 22, 2006
Funds of hedge funds protect capital and outperform
Funds of hedge funds appear to have done what most investors buy them for, which is to preserve capital and even produce positive returns during a market downturn.
The sector has had a bumper fund-raising year but ABN Amro analysis suggests that many of the funds are performing well.
Research by the house shows that when the FTSE 100 had its worst month in May, recording a fall of 5 percent amid concerns over interest rates and commodity prices, no sterling-hedged fund of hedge funds listed in London underperformed it.
Close Man Hedge came closest, with its net asset value falling 3.9 percent over the month but the average performance for the group was 1.9 percent. Acencia Debt Strategies even rose over the month.
However, funds of hedge funds still show signs of being able to outperform on the upside.
During the best month for the FTSE 100 in March, when it gained 3 percent, four LSE-listed fund of hedge funds beat this.
Mark James, ABN Amro secondary team director of research, said: "Five of the LSE-listed fund of funds - Acencia Debt Strategies, HSBC European Absolute, Man Alternative, Tapestry Investment and Thames River Hedge+ - outperformed the FTSE 100 index over the first six months of the year.
"Overall, the sample did reasonably well in preserving assets in falling markets and some outperformed on the upside."
In fact the Acencia Debt Strategies fund can boast a 100 percent record in producing a positive return in each of the first six months of the year. Schroder Alternative Strategies and Tapestry Investment Company managed an 80 percent record in line with the FTSE 100.
Funds of hedge funds are becoming an increasingly important part of the London market with 1 billion pounds raised so far this year to bring the UK market size to 2.5 billion pounds, even larger than Zurich. The listings included the three largest ever IPOs for Close All Blue, CMA Global Hedge and Goldman Sachs Dynamic Opportunities .
Closed-end fund of hedge funds are often more popular than the open-ended variety because of their tax status.
The majority are of closed-end funds of hedge funds incorporated in Guernsey and are exempt from the territory's income tax and capital gains within the portfolio.
For UK investors any gains on the disposal of shares should be subject to capital gains tax rather than the income tax payable when selling many offshore open-ended funds.
Many shares are also eligible for PEP, ISA and SIPP investment.
James said: "For fund of hedge fund providers, the fixed capital structure provides them with the flexibility of managing a fixed pool of assets and avoids the distractions of inflows and outflows.
"It may make it easier to take longer-term commitments, for example, to emerging managers or less liquid hedge-fund strategies."
-Reuters-
Posted by su at September 22, 2006 12:01 PM