|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. www.fundmonitors.com
|Fund Name||Strategy||Minimum Investment||Redemption Frequency||1 Year||3 Years pa.||5 years p.a.|
|8IP Asia Pacific Partners Fund||Equity Long/Short||$50,000||Monthly||2.76%||-5.75%||-|
|Aberdeen Asian Opportunities Fund||Equity Long||$20,000||Daily||14.13%||7.80%||5.59%|
|Aberdeen Emerging Opportunities Fund||Equity Long||$20,000||Daily||12.41%||7.33%||6.99%|
|Access SRA Fund - SRA 16 Portfolio||Multi Strategy||$15,000||Monthly||-5.32%||7.98%||13.40%|
|Access SRA Fund - SRA 4 Portfolio||Multi Strategy||$15,000||Monthly||-1.35%||4.43%||5.15%|
|Access SRA Fund - SRA 9 Portfolio||Multi Strategy||$15,000||Monthly||7.56%||7.23%||7.50%|
|Altius Bond Fund||Fixed Income||$5,000||Daily||6.16%||-||-|
|Antares High Growth Shares Fund||Equity Long/Short||$20,000||Daily||25.67%||7.55%||4.72%|
|Apeiron Global Macro Fund - Class A||Global Macro||$50,000||Monthly||-0.67%||2.70%||3.23%|
|AQR Wholesale DELTA Fund||Multi Strategy||$50,000||Monthly||5.54%||5.64%||-|
|AQR Wholesale Managed Futures Fund||Managed Futures||$50,000||Daily||24.44%||-||-|
|Ardea Wholesale Australian Inflation Linked Bond Fund||Fixed Income||$10,000||Daily||11.83%||12.25%||-|
|Armytage Australian Equity Income Fund||Equity Buy Write||$50,000||Daily||27.22%||6.90%||4.32%|
|Armytage Strategic Opportunities - Retail Class||Equity Buy Write||$20,000||Daily||21.83%||7.45%||3.37%|
|Arnhem Australian Equity Fund||Equity Long||$20,000||Daily||23.83%||-||-|
|Arnhem Concentrated Australian Equity Fund||Equity Long||$20,000||Daily||23.92%||-||-|
|Arnhem Long Short Australian Equity Fund||Equity Long/Short||$20,000||Daily||22.42%||6.01%||8.54%|
|Aubrey Global Conviction Fund||Equity Long||$25,000||Daily||8.48%||-||-|
|AUI Wingate Global Equity Fund||Equity Income||$25,000||Daily||13.11%||7.47%||1.28%|
|Aurora Dividend Income Trust||Equity Income||$2,000||Daily||20.39%||9.55%||7.28%|
|Aurora Fortitude Absolute Return Fund||Equity Market Neutral||$10,000||Daily||5.25%||5.06%||6.05%|
|Aurora Global Income Trust||Equity Buy Write||$2,000||Daily||6.66%||4.89%||3.80%|
|Aurora Property Buy-Write Income Trust||Equity Buy Write||$2,000||Daily||18.81%||10.35%||7.09%|
|Ausbil Active Extension Fund - Retail||Equity 130/30||$50,000||Daily||23.06%||-||-|
|Ausbil Active Extension Fund - Wholesale||Equity 130/30||$50,000||Daily||23.42%||6.05%||-|
|Baker Steel Gold||Equity Long||$25,000||Weekly||-47.83%||-20.73%||-7.78%|
|Bennelong Australian Equities Fund||Equity Long||$50,000||Daily||23.63%||11.24%||-|
|Bennelong Avoca Emerging Leaders Fund||Equity Long||$20,000||Daily||3.48%||-||-|
|Bennelong Concentrated Australian Equities Fund||Equity Long||$50,000||Daily||24.61%||12.82%||-|
|Bennelong ex-20 Australian Equities Fund||Equity Long||$50,000||Daily||12.35%||12.34%||-|
|Bennelong Kardinia Absolute Return Fund||Equity Long/Short||$20,000||Daily||15.89%||10.47%||10.97%|
|Bentham Wholesale Global Income Fund||Fixed Income||$10,000||Daily||17.07%||11.21%||10.41%|
|Bentham Wholesale Syndicated Loan Fund||Fixed Income||$10,000||Daily||12.91%||11.28%||10.71%|
|Blackrock Global Allocation Fund (Class D)||Global Macro||$5,000||Daily||14.10%||9.08%||5.96%|
|Blackrock International Gold Fund (Class D)||Equity Long||$5,000||Daily||-31.55%||-16.66%||-9.26%|
|Certitude Asian Opportunities Fund||Multi Strategy||$5,000||Daily||17.47%||-||-|
|Colonial First State Wholesale Equity Income||Equity Buy Write||$5,000||Daily||19.23%||7.63%||6.34%|
|CORALS Commodities Fund||Commodities/CTA||$10,000||Daily||-12.22%||-4.18%||-|
|CSAG Long/Short Program||Commodities/CTA||$50,000||Monthly||-3.61%||-2.41%||2.18%|
|DDH Global Fixed Interest Alpha Fund||Fixed Income||$5,000||Daily||7.27%||1.52%||4.66%|
|Dexia Alpha Dynamic Fund||Multi Strategy||$50,000||Monthly||8.52%||-||-|
|EIM Emerging Resources Company Share Fund||Equity Long||$10,000||Weekly||-32.09%||-14.29%||-12.10%|
|Elstree Australian Enhanced Income Fund||Convertible Arbitrage||$1,000||Daily||8.61%||5.88%||3.52%|
|Insync Global Titans Fund||Equity Long||$50,000||Monthly||16.41%||10.42%||-|
|Intelligent Investor Value Fund||Equity Long||$10,000||Monthly||30.07%||11.65%||-|
|Ironbark Global Diversified Alternatives Fund||Global Diversified||$25,000||Monthly||2.42%||1.10%||-2.28%|
|JBS Investments International Advantage Fund||Equity Long/Short||$20,000||Monthly||3.02%||-||-|
|K2 Asian Absolute Return Fund||Equity Long/Short||$20,000||Monthly||21.71%||3.83%||4.21%|
|K2 Australian Absolute Return Fund||Equity Long/Short||$20,000||Monthly||23.99%||7.11%||8.99%|
|K2 Select International Absolute Return Fund||Equity Long/Short||$20,000||Monthly||13.30%||6.49%||6.02%|
|Kohinoor Series Three Fund||Global Macro||$50,000||Monthly||-2.58%||1.00%||9.44%|
|LHP Diversified Investments Fund (Retail)||Global Diversified||$5,000||Quarterly||8.47%||6.79%||1.48%|
|LHP Global Long/Short Fund (Retail)||Equity Long/Short||$5,000||Monthly||9.75%||7.22%||6.11%|
|Lime Street Australian Resources Hi-alpha Fund||Equity Long||$25,000||Daily||-45.12%||-11.09%||-|
|Macquarie Asian Alpha Fund (Australian Fund)||Equity Long/Short||$20,000||Monthly||17.48%||14.91%||11.95%|
|Macquarie Winton Global Alpha Fund||Managed Futures||$5,000||Daily||6.78%||8.85%||7.68%|
|Magellan Global Fund||Equity Long||$20,000||Daily||22.81%||13.78%||10.15%|
|Man AHL Diversified (AUD)||Managed Futures||$20,000||Weekly||6.43%||4.79%||4.00%|
|MCG Multi-Asset Endowment Fund||Multi Strategy||$25,000||Monthly||10.75%||7.04%||5.80%|
|Merricks Soft Commodity Fund||Commodities/CTA||$50,000||Monthly||2.87%||7.95%||9.80%|
|Microequities Deep Value Microcap Fund||Equity Long||$50,000||Monthly||28.73%||-||-|
|Morphic Global Opportunities Fund||Equity Long/Short||$10,000||Daily||28.70%||-||-|
|NAOS Emerging Companies Long Short Equities Fund||Equity 130/30||$40,000||Daily||-9.99%||5.59%||11.24%|
|NAOS Long Short Equities Fund||Equity 130/30||$25,000||Daily||39.86%||8.90%||-1.00%|
|Northward Equity Income||Equity Income||$20,000||Daily||10.98%||-||-|
|OC Concentrated Equity Fund||Equity Long/Short||$50,000||Monthly||-13.64%||0.95%||11.75%|
|OC Dynamic Equity Fund||Equity Long||$25,000||Daily||23.67%||13.09%||7.00%|
|OC Premium Equity Fund||Equity Long||$25,000||Daily||24.14%||13.24%||6.80%|
|Pengana Asia Special Events (Onshore) Fund||Event Driven||20000||Daily||8.23%||8.09%||-|
|Pengana Australian Equities Fund||Equity Long||$20,000||Daily||25.91%||15.34%||-|
|Pengana Australian Equities Market Neutral Fund||Equity Market Neutral||$20,000||Daily||-5.53%||9.74%||-|
|Pengana Emerging Companies Fund||Equity Long||$25,000||Daily||24.50%||11.67%||8.76%|
|Perpetual Diversified Real Return Fund||Multi Strategy||$25,000||Daily||12.24%||-||-|
|Perpetual Global Resources Fund - Class B||Equity Long||$25,000||Daily||-13.85%||-3.28%||-|
|Perpetual Wholesale Industrial Fund||Equity Long||$25,000||Daily||34.43%||12.02%||7.88%|
|Perpetual Wholesale SHARE-PLUS Long-Short Fund||Equity Long/Short||$50,000||Daily||31.27%||13.63%||7.68%|
|Peters Macgregor Global Fund||Equity Long||$10,000||Weekly||18.13%||10.01%||5.50%|
|Pimco EQT Wholesale Global Bond Fund||Fixed Income||$50,000||Daily||12.15%||11.34%||10.61%|
|PIMCO Wholesale Diversified Fixed Interest Fund||Fixed Income||$20,000||Daily||10.16%||10.13%||10.32%|
|Pimco Wholesale Emerging Markets Bond Fund||Fixed Income||$20,000||Daily||14.40%||13.57%||11.29%|
|Pimco Wholesale Global Credit Fund||Fixed Income||$20,000||Daily||10.45%||10.25%||11.42%|
|Pimco Wholesale Global Real Return Fund||Fixed Income||$20,000||Daily||12.90%||13.01%||11.02%|
|Platinum Asia Fund||Equity Long/Short||$20,000||Daily||16.58%||3.64%||3.96%|
|Platinum European Fund||Equity Long/Short||$20,000||Daily||13.87%||8.88%||6.95%|
|Platinum International Brands Fund||Equity Long/Short||$20,000||Daily||16.96%||9.84%||11.45%|
|Platinum International Fund||Equity Long/Short||$20,000||Daily||18.49%||2.29%||5.35%|
|Platinum International Technology Fund||Equity Long/Short||$20,000||Daily||8.02%||0.65%||5.47%|
|Platinum Japan Fund - AUD||Equity Long/Short||$20,000||Daily||39.95%||10.84%||11.83%|
|Platinum Unhedged Fund||Equity Long||$20,000||Daily||17.64%||4.14%||6.52%|
|Plato Australian Shares 130/30 Fund||Equity 130/30||$50,000||Daily||22.69%||8.76%||1.17%|
|Plato Australian Shares Core Fund||Equity Long||$50,000||Daily||24.60%||8.57%||2.34%|
|Plato Australian Shares Market Neutral Fund||Equity Buy Write||$50,000||Daily||10.29%||9.14%||3.33%|
|Platypus Australian Equity Fund||Equity Long||$25,000||Daily||17.17%||5.75%||2.10%|
|PM CAPITAL Absolute Performance Fund AUD||Equity Long/Short||$20,000||Daily||33.59%||4.80%||1.07%|
|PM Capital Emerging Asia Fund||Equity Long||$20,000||Daily||9.71%||4.45%||-|
|PM CAPITAL Enhanced Yield Fund||Equity Long/Short||$20,000||Daily||6.48%||6.14%||6.32%|
|Premier Global Select Fund||Equity Long||$20,000||Daily||12.44%||0.93%||0.35%|
|Prime Value Growth Fund||Equity Long||$40,000||Daily||15.56%||6.90%||3.05%|
|Prime Value Imputation Fund||Equity Long||$40,000||Daily||18.73%||6.97%||1.72%|
|Samuel Terry Absolute Return Fund||Equity Long||$50,000||Monthly||10.85%||20.74%||12.98%|
|Select Alternatives Portfolio||Multi Strategy||$25,000||Weekly||2.34%||2.81%||1.24%|
|Select Defensive Portfolios||Multi Strategy||$25,000||Weekly||4.42%||4.28%||2.38%|
|Select Growth||Multi Strategy||$25,000||Weekly||3.37%||3.42%||2.36%|
|Select Listed Investments||Multi Strategy||$50,000||Monthly||12.78%||7.29%||2.33%|
|SGH 20||Equity Long||$20,000||Daily||4.37%||2.10%||0.86%|
|SGH Absolute Return Trust (Retail)||Equity Long/Short||$5,000||Daily||14.25%||1.27%||-7.62%|
|SGH Absolute Return Trust (Wholesale)||Equity Long/Short||$50,000||Daily||15.80%||3.49%||-6.31%|
|SGH ICE||Equity Long||$20,000||Daily||28.53%||12.68%||11.90%|
|SGH Wholesale Property Income Fund||Real Estate||$5,000||Daily||31.76%||16.82%||-2.17%|
|Smallco Investment Fund||Equity Long/Short||$40,000||Daily||57.13%||23.81%||13.35%|
|Tribeca Australian Smaller Companies Fund||Equity Long||$25,000||Daily||-0.96%||-||-|
|Van Eyk Blueprint Alternatives Plus||Multi Strategy||$2,000||Daily||1.04%||4.21%||2.08%|
|WAM Active Ltd||Equity Long/Short||1000||Daily||13.25%||7.50%||11.70%|
|WAM Capital Ltd||Equity Long/Short||1000||Daily||17.82%||12.20%||11.25%|
|WAM Research Ltd||Equity Long||$1,000||Daily||24.17%||11.78%||7.43%|
|Wilson HTM Priority Core Fund||Equity Long||$20,000||Daily||27.02%||-||-|
|Wilson HTM Priority Growth Fund||Equity Long||$40,000||Daily||-2.28%||0.43%||8.59%|
|Zurich Global Equity Income Fund||Equity Buy Write||$5,000||Daily||9.67%||-||-|