Hedge funds mean different things to different people, usually because the term is often used interchangeably with the term “alternative investments”, which in fact can include non hedge fund investments, including even property. The classical definition of a hedge fund was a fund that, unlike conventional long-only funds, was allowed to short investments in its investment mandate. By definition, this shorting option increases the hedging options open to the portfolio manager, and, by definition, thus, a hedge fund has a lower risk profile than a long-only fund.
Hedge funds, however, can be risky, and have not done as well in the market volatility of the past year as they did in the early 2000s (when there were less competing hedge fund strategies in the markets). The safest option has been to invest in funds of hedge funds, which, at a cost, offer a further hedge”, by spreading the portfolio over a group of individual hedge fund managers.
Shane Gill, associate director at Key Capital Private, says, ‘The minimum for an investor to access a hedge fund directly is very high, up to and over €1 million. Wealth managers and investment banks can offer access to the hard/soft closed hedge funds of high quality (top quartile) that could not otherwise be accessed.’ ‘A large number of the 2,000-3,000 hedge funds in the hedge fund universe are domiciled in ‘tax havens’ and any gains being reintroduced into Ireland are virtually wiped out by the top bracket Capital Gains Tax that applies.’ Investors should look therefore at the hedge funds that are domiciled in Ireland or Luxembourg.
Brian Weber, executive director and head of the Dublin office at Citigroup Quilter, says ‘Most international investment managers also have funds that are suitable for Irish investors, with the possible exception of hedge funds. The majority of hedge funds are domiciled in the Cayman Islands, with some in Guernsey, these all have punitive rates of capital gains tax for Irish investors, so one needs to be very careful in choosing hedge funds, be they stock exchange listed or otherwise.’
- Barclays Wealth London offers multi strategy, single manager, fund of funds, closed ended/listed, hedge fund structured products
- Investec offers its Absolute Alpha fund, a dynamically leveraged basket of hedge funds
- AIB Private Banking will be developing further products in the alternative asset area over the next couple of years and would see hedge funds as a short-term focus in this regard.
- Merrion Capital offers clients hedge fund investment opportunities
- Merrill Lynch offers access to premier single and multi-manager hedge funds on an advisory and discretionary basis
- Citigroup Quilter offers discretionary and advisory portfolios in funds of hedge funds
- Davy Private Clients offers discretionary and advisory services for hedge fund investment
- Helvetia Wealth AG offers a range of hedge fund products to investors
- Key Capital Private offers a range of hedge fund allocations.
Fund of Hedge Funds
A fund of hedge funds is a fund which invests in one or more different hedge funds to spread the risk involved. Funds of hedge funds select hedge fund managers and construct portfolios based upon those selections. The fund of hedge funds is responsible for hiring and firing the managers in the fund. Some funds of hedge funds might have only one hedge fund in it, thus letting ordinary investors into a highly-acclaimed fund, or many hedge funds.
Funds of hedge funds generally charge a fee for their services, always in addition to the hedge fund’s management and performance fees, which can be 1.5 per cent and 15-30 per cent, respectively. Although returns can be high, fees will always cut into your profits and sometimes make your total return less than what it would be if you did it alone or with an average market mutual fund or exchange-traded fund (ETF).
Shane Gill said, ‘Previous investors in Ireland have accessed a single manager, single strategy ‘super fund’ that when the strategy fails, things go wrong. Many wealth mangers target multi manager, multi strategy funds to offer diversity, reducing volatility of returns.’
Brian Weber says ‘We only invest in funds of hedge funds; we do so to reduce risk. Single strategy hedge funds often provide too much volatility for individual clients.’ |
