Clipping the hedge fund investing myths

Retail investors have ready access to hedge funds ... the key is making the right choice.

Summary: Australian retail investors have ready access to hedge funds, with minimum investment amounts ranging from as little as $2,000. But the key challenge for investors is understanding the investment strategies of the funds available, especially considering that there has been a significant difference in returns over time between the best and worst funds.
Key take-out: Another difficulty for investors is the fact that funds, which might perform well in one particular environment, may struggle under different market conditions.
Key beneficiaries: General investors. Category: Growth.

Among the many common misconceptions about hedge funds is that they are not available, or suitable, for retail investors.

As with many inaccuracies about hedge funds, these misconceptions arise partly out of the history of the hedge fund sector, partly out of overseas experience and partly out of a lack of knowledge or education by the industry in Australia.

The main focus of these misconceptions generally sits with the minimum investment required for absolute return or alternative managed funds, with it frequently being reported that they are only open to sophisticated investors or institutions. This is, and has been, the case in the United States where the industry first evolved, and is also often the case in Europe, although this has changed with the introduction of what are known as “UCITS” funds (Undertakings for Collective Investment in Transferable Securities).

Added to the perception that absolute return and hedge funds strategies are only open to sophisticated investors is that they have limited liquidity and frequent “lock-ups”, where the initial investment cannot be redeemed for periods of 12 months or more without penalty. Once again this has often been the case in the United States, and particularly with those funds which invest in more illiquid assets or that use strategies requiring time before the investment’s pay-off could emerge.

Ready access for investors

In Australia, however, the simple facts are that there are a wide array of absolute return and hedge funds available to individual investors with minimum investment amounts ranging from as little as $2,000. Furthermore, the liquidity of the majority of funds in Australia with minimum investment amounts of $50,000 or less is daily or weekly. In addition, there are a wide range of strategies open to investments of less than $50,000, even though the majority are equity-based.

So firstly, let’s look at the total universe of 214 funds in our database that are currently open to investment. Of these, 120 (over 50%) have a minimum investment amount of $50,000 or less.

Breaking down the data for those funds open to investment of less than $50,000, we can see that 75% of them have minimum investments below $25,000. Clearly size is not a barrier to investment in absolute return and hedge funds by smaller or retail investors.

Turning to the variety of funds also shows that there is an wide choice between asset classes and their investment strategies, which is on a par with the choice available to large investors and institutions. For this purpose I have divided asset classes between those funds investing in equities, whether local or global, from those investing in alternative assets such as commodities currencies or fixed income.

Picking a hedge fund strategy

Inevitably the majority of funds invest in equities, even though the variety of strategies available within each of the two broad asset classes is considerable. Therein lies part of the challenge for retail investors and their advisers: the variety of investment strategies employed by the various funds makes both understanding, analysing and selecting suitable funds far more of a challenge for the smaller investor than actually finding funds which are open to their investment.

Some investors may question the inclusion of “equity long” strategies in these tables, but the definition I use when filtering strategies with equity long funds is that they can be highly concentrated or, in the event of concerns about market direction, can move to cash to avoid market risk. In addition, some equity long funds use broad derivative exposures to hedge against market risk.

Turning to the criticism that absolute return and hedge funds are illiquid, with lock-ups and redemption periods that are unattractive to retail investors. Once again the facts clearly disprove this, not only for funds with lower minimum investment amounts, but also for all funds in the database. This is an area where Australian funds differ significantly from their North American counterparts, which do frequently have longer lock-ups, generally a minimum of one month, but frequently three months or more.

Availability vs suitability?

Finally, of course, there is the issue that even if funds are available to investors with less than $50,000, are they suitable for retail or unsophisticated investors?  This is much more to the point and I would suggest that the research industry in Australia, which frequently struggles to overcome basic conflicts of interest, has not in the past always provided retail investors or their advisers with a reliable source of accurate or reliable information on which to base their decision.

Frequently absolute return and hedge funds are criticised for poor performance, and as I have always acknowledged, there are funds where performance has been substandard, or which I would have thought were not suitable for unsophisticated or risk averse investors.  For this, some research houses, overly enthusiastic marketers, and ill-informed advisers should shoulder the blame.

However, the reality is that there are funds open to investments of less than $50,000 and available to retail investors which have provided excellent risk-adjusted returns, as can be seen in the following tables showing the distribution of returns over the past one, three, and five years.

What is apparent when looking at each of the three time periods is the significant difference in performance between the best and worst funds, and this in part explains why it is so difficult for retail investors (or any investor for that matter) to select between the various funds available. Added to this difficulty is the fact that funds, which might perform well in one particular environment, may struggle under different market conditions.

I am a supporter of the absolute return and hedge fund sector. However, I am not a blind follower and am well aware of the risks and dangers of funds that have been, in my opinion, incorrectly marketed to retail investors. I believe that the structure of fund research, and the distribution process for retail investors, has the potential for significant improvement.

There is no doubt that the more complex investment strategies involved with hedge funds demand significantly greater understanding by investors, and therefore research and investigation. However the clear fact is that the best funds (not always in the majority) do provide investors with the benefit of significantly better risk-adjusted performance.

Chris Gosselin is chief executive officer of Australian Fund Monitors Pty Ltd.

Fund NameStrategyMinimum InvestmentRedemption Frequency1 Year3 Years pa.5 years p.a.
8IP Asia Pacific Partners FundEquity Long/Short$50,000Monthly2.76%-5.75%-
Aberdeen Asian Opportunities FundEquity Long$20,000Daily14.13%7.80%5.59%
Aberdeen Emerging Opportunities FundEquity Long$20,000Daily12.41%7.33%6.99%
Access SRA Fund - SRA 16 PortfolioMulti Strategy$15,000Monthly-5.32%7.98%13.40%
Access SRA Fund - SRA 4 PortfolioMulti Strategy$15,000Monthly-1.35%4.43%5.15%
Access SRA Fund - SRA 9 PortfolioMulti Strategy$15,000Monthly7.56%7.23%7.50%
Altius Bond FundFixed Income$5,000Daily6.16%--
Antares High Growth Shares FundEquity Long/Short$20,000Daily25.67%7.55%4.72%
Apeiron Global Macro Fund - Class AGlobal Macro$50,000Monthly-0.67%2.70%3.23%
AQR Wholesale DELTA FundMulti Strategy$50,000Monthly5.54%5.64%-
AQR Wholesale Managed Futures FundManaged Futures$50,000Daily24.44%--
Ardea Wholesale Australian Inflation Linked Bond FundFixed Income$10,000Daily11.83%12.25%-
Armytage Australian Equity Income FundEquity Buy Write$50,000Daily27.22%6.90%4.32%
Armytage Strategic Opportunities - Retail ClassEquity Buy Write$20,000Daily21.83%7.45%3.37%
Arnhem Australian Equity FundEquity Long$20,000Daily23.83%--
Arnhem Concentrated Australian Equity FundEquity Long$20,000Daily23.92%--
Arnhem Long Short Australian Equity FundEquity Long/Short$20,000Daily22.42%6.01%8.54%
Aubrey Global Conviction FundEquity Long$25,000Daily8.48%--
AUI Wingate Global Equity FundEquity Income$25,000Daily13.11%7.47%1.28%
Aurora Dividend Income TrustEquity Income$2,000Daily20.39%9.55%7.28%
Aurora Fortitude Absolute Return FundEquity Market Neutral$10,000Daily5.25%5.06%6.05%
Aurora Global Income TrustEquity Buy Write$2,000Daily6.66%4.89%3.80%
Aurora Property Buy-Write Income TrustEquity Buy Write$2,000Daily18.81%10.35%7.09%
Ausbil Active Extension Fund - RetailEquity 130/30$50,000Daily23.06%--
Ausbil Active Extension Fund - WholesaleEquity 130/30$50,000Daily23.42%6.05%-
Baker Steel GoldEquity Long$25,000Weekly-47.83%-20.73%-7.78%
Bennelong Australian Equities FundEquity Long$50,000Daily23.63%11.24%-
Bennelong Avoca Emerging Leaders FundEquity Long$20,000Daily3.48%--
Bennelong Concentrated Australian Equities FundEquity Long$50,000Daily24.61%12.82%-
Bennelong ex-20 Australian Equities FundEquity Long$50,000Daily12.35%12.34%-
Bennelong Kardinia Absolute Return FundEquity Long/Short$20,000Daily15.89%10.47%10.97%
Bentham Wholesale Global Income FundFixed Income$10,000Daily17.07%11.21%10.41%
Bentham Wholesale Syndicated Loan FundFixed Income$10,000Daily12.91%11.28%10.71%
Blackrock Global Allocation Fund (Class D)Global Macro$5,000Daily14.10%9.08%5.96%
Blackrock International Gold Fund (Class D)Equity Long$5,000Daily-31.55%-16.66%-9.26%
Certitude Asian Opportunities FundMulti Strategy$5,000Daily17.47%--
Colonial First State Wholesale Equity IncomeEquity Buy Write$5,000Daily19.23%7.63%6.34%
CORALS Commodities FundCommodities/CTA$10,000Daily-12.22%-4.18%-
CSAG Long/Short ProgramCommodities/CTA$50,000Monthly-3.61%-2.41%2.18%
DDH Global Fixed Interest Alpha FundFixed Income$5,000Daily7.27%1.52%4.66%
Dexia Alpha Dynamic FundMulti Strategy$50,000Monthly8.52%--
EIM Emerging Resources Company Share FundEquity Long$10,000Weekly-32.09%-14.29%-12.10%
Elstree Australian Enhanced Income FundConvertible Arbitrage$1,000Daily8.61%5.88%3.52%
Insync Global Titans FundEquity Long$50,000Monthly16.41%10.42%-
Intelligent Investor Value FundEquity Long$10,000Monthly30.07%11.65%-
Ironbark Global Diversified Alternatives FundGlobal Diversified$25,000Monthly2.42%1.10%-2.28%
JBS Investments International Advantage FundEquity Long/Short$20,000Monthly3.02%--
K2 Asian Absolute Return FundEquity Long/Short$20,000Monthly21.71%3.83%4.21%
K2 Australian Absolute Return FundEquity Long/Short$20,000Monthly23.99%7.11%8.99%
K2 Select International Absolute Return FundEquity Long/Short$20,000Monthly13.30%6.49%6.02%
Kohinoor Series Three FundGlobal Macro$50,000Monthly-2.58%1.00%9.44%
LHP Diversified Investments Fund (Retail)Global Diversified$5,000Quarterly8.47%6.79%1.48%
LHP Global Long/Short Fund (Retail)Equity Long/Short$5,000Monthly9.75%7.22%6.11%
Lime Street Australian Resources Hi-alpha FundEquity Long$25,000Daily-45.12%-11.09%-
Macquarie Asian Alpha Fund (Australian Fund)Equity Long/Short$20,000Monthly17.48%14.91%11.95%
Macquarie Winton Global Alpha FundManaged Futures$5,000Daily6.78%8.85%7.68%
Magellan Global FundEquity Long$20,000Daily22.81%13.78%10.15%
Man AHL Diversified (AUD)Managed Futures$20,000Weekly6.43%4.79%4.00%
MCG Multi-Asset Endowment FundMulti Strategy$25,000Monthly10.75%7.04%5.80%
Merricks Soft Commodity FundCommodities/CTA$50,000Monthly2.87%7.95%9.80%
Microequities Deep Value Microcap FundEquity Long$50,000Monthly28.73%--
Morphic Global Opportunities FundEquity Long/Short$10,000Daily28.70%--
NAOS Emerging Companies Long Short Equities FundEquity 130/30$40,000Daily-9.99%5.59%11.24%
NAOS Long Short Equities FundEquity 130/30$25,000Daily39.86%8.90%-1.00%
Northward Equity IncomeEquity Income$20,000Daily10.98%--
OC Concentrated Equity FundEquity Long/Short$50,000Monthly-13.64%0.95%11.75%
OC Dynamic Equity FundEquity Long$25,000Daily23.67%13.09%7.00%
OC Premium Equity FundEquity Long$25,000Daily24.14%13.24%6.80%
Pengana Asia Special Events (Onshore) FundEvent Driven20000Daily 8.23%8.09%-
Pengana Australian Equities FundEquity Long$20,000Daily25.91%15.34%-
Pengana Australian Equities Market Neutral FundEquity Market Neutral$20,000Daily-5.53%9.74%-
Pengana Emerging Companies FundEquity Long$25,000Daily24.50%11.67%8.76%
Perpetual Diversified Real Return FundMulti Strategy$25,000Daily12.24%--
Perpetual Global Resources Fund - Class BEquity Long$25,000Daily-13.85%-3.28%-
Perpetual Wholesale Industrial FundEquity Long$25,000Daily34.43%12.02%7.88%
Perpetual Wholesale SHARE-PLUS Long-Short FundEquity Long/Short$50,000Daily31.27%13.63%7.68%
Peters Macgregor Global FundEquity Long$10,000Weekly18.13%10.01%5.50%
Pimco EQT Wholesale Global Bond FundFixed Income$50,000Daily12.15%11.34%10.61%
PIMCO Wholesale Diversified Fixed Interest FundFixed Income$20,000Daily10.16%10.13%10.32%
Pimco Wholesale Emerging Markets Bond FundFixed Income$20,000Daily14.40%13.57%11.29%
Pimco Wholesale Global Credit FundFixed Income$20,000Daily10.45%10.25%11.42%
Pimco Wholesale Global Real Return FundFixed Income$20,000Daily12.90%13.01%11.02%
Platinum Asia FundEquity Long/Short$20,000Daily16.58%3.64%3.96%
Platinum European FundEquity Long/Short$20,000Daily13.87%8.88%6.95%
Platinum International Brands FundEquity Long/Short$20,000Daily16.96%9.84%11.45%
Platinum International FundEquity Long/Short$20,000Daily18.49%2.29%5.35%
Platinum International Technology FundEquity Long/Short$20,000Daily8.02%0.65%5.47%
Platinum Japan Fund - AUDEquity Long/Short$20,000Daily39.95%10.84%11.83%
Platinum Unhedged FundEquity Long$20,000Daily17.64%4.14%6.52%
Plato Australian Shares 130/30 FundEquity 130/30$50,000Daily22.69%8.76%1.17%
Plato Australian Shares Core FundEquity Long$50,000Daily24.60%8.57%2.34%
Plato Australian Shares Market Neutral FundEquity Buy Write$50,000Daily10.29%9.14%3.33%
Platypus Australian Equity FundEquity Long$25,000Daily17.17%5.75%2.10%
PM CAPITAL Absolute Performance Fund AUDEquity Long/Short$20,000Daily33.59%4.80%1.07%
PM Capital Emerging Asia FundEquity Long$20,000Daily9.71%4.45%-
PM CAPITAL Enhanced Yield FundEquity Long/Short$20,000Daily6.48%6.14%6.32%
Premier Global Select FundEquity Long$20,000Daily12.44%0.93%0.35%
Prime Value Growth FundEquity Long$40,000Daily15.56%6.90%3.05%
Prime Value Imputation FundEquity Long$40,000Daily18.73%6.97%1.72%
Samuel Terry Absolute Return FundEquity Long$50,000Monthly10.85%20.74%12.98%
Select Alternatives PortfolioMulti Strategy$25,000Weekly2.34%2.81%1.24%
Select Defensive PortfoliosMulti Strategy$25,000Weekly4.42%4.28%2.38%
Select GrowthMulti Strategy$25,000Weekly3.37%3.42%2.36%
Select Listed InvestmentsMulti Strategy$50,000Monthly12.78%7.29%2.33%
SGH 20Equity Long$20,000Daily4.37%2.10%0.86%
SGH Absolute Return Trust (Retail)Equity Long/Short$5,000Daily14.25%1.27%-7.62%
SGH Absolute Return Trust (Wholesale)Equity Long/Short$50,000Daily15.80%3.49%-6.31%
SGH ICEEquity Long$20,000Daily28.53%12.68%11.90%
SGH Wholesale Property Income FundReal Estate$5,000Daily31.76%16.82%-2.17%
Smallco Investment FundEquity Long/Short$40,000Daily57.13%23.81%13.35%
Tribeca Australian Smaller Companies FundEquity Long$25,000Daily-0.96%--
Van Eyk Blueprint Alternatives PlusMulti Strategy$2,000Daily1.04%4.21%2.08%
WAM Active LtdEquity Long/Short1000Daily13.25%7.50%11.70%
WAM Capital LtdEquity Long/Short1000Daily17.82%12.20%11.25%
WAM Research LtdEquity Long$1,000Daily24.17%11.78%7.43%
Wilson HTM Priority Core FundEquity Long$20,000Daily27.02%--
Wilson HTM Priority Growth FundEquity Long$40,000Daily-2.28%0.43%8.59%
Zurich Global Equity Income FundEquity Buy Write$5,000Daily9.67%--

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