Hedge funds have traditionally been beyond the reach of most investors, but that’s changing as a raft of new hedge ‘fund of funds’ list on the stockmarket. Investors can buy and sell shares in these funds of funds, just like conventional investment trusts; the difference is that they get exposure to derivatives and other exotic instruments through the funds’ underlying hedge-fund investments. But should investors be tempted by the diversification opportunities this offers?
Maybe not, says Simon Nixon of Breakingviews.com. Just take a look at the hefty fees involved. For example, the CMA Global Hedge fund of funds charges a management fee of 1.25% and a performance fee of 5%. This may not look too steep, but remember that CMA invests in hedge funds, which typically charge a 2% management fee and a 20% performance fee. “Suddenly, those fees start to stack up.”
CMA is targeting a return of around 12% a year after fees. This means that it needs to invest in hedge funds that can return 20% a year before fees. Even by leveraging – loading up with debt – it will need 13%-14% a year. “Few funds can deliver that kind of consistency.” In fact, the average long-term return on the CSFB/ Tremont hedge-fund index is just 8.2% after fees. So while a hedge fund of funds could add useful diversification to your portfolio, it would be unwise to expect it to meet those targets every year.
Europe’s lacklustre reputation is undeserved
Beset by high unemployment and welfare bills and with an ageing population, Europe has not been seen as an investment hotspot in recent years. But that may be unfair, says Mark Dampier of Hargreaves Lansdown, quoted in The Daily Telegraph. He argues that investors’ perceptions have been distorted by headline-grabbing growth rates in India and China and low ones in Europe. “Most people seem to think that there is a relation-
ship between gross domestic product (GDP) and the stockmarket. But a strong GDP does not necessarily imply a strong stockmarket.”
Managers claim that the European market is underresearched and riven with inefficiencies, says Stephen Spurdon, also in The Daily Telegraph. Funds that have capitalised on this include Threadneedle European Smaller Companies Unit Trust, which is up 220% over five years, and JP Morgan European Fledging Investment Trust, which has returned 216% in the same period.
by Simon O’Brian