High net worth money and a buoyant investment market have fuelled Australian investors' appetite for hedge funds, but what is the future for this sexy new investment class.
This week James Dunn looks at the trends in the international hedge fund market. Institutional investors have increased their exposure to this asset class tenfold in four years. For retail investors, the drawbacks include poor liquidity and high fees, which can be more than 20 per cent of any returns.
In the past, absolute return hedge funds were seen as an alternative in times of poor stock market returns, however, not all are able to operate equally profitably in both rising and falling markets.
Again, it is important to understand the underlying investment of the particular fund you are using. Whether the fund is focused on market trends, taking positions in currencies or long/short equity, arbitraging, or leverage, it's important to make sure these strategies suit the purpose, fit with a diversified portfolio and meet the risk appetite. Looking at the management of the fund is also important. While, like boutiques they have attracted some manager fund managing talent, they are often key man focused.
As always it's timely to check exactly what your investments are doing. For example, the collapse of Bridgecorp shows the New Zealand-based investment company loaned money to Westpoint. The total investor funds affected in the collapses of Westpoint, Fincorp, ACR and now Bridgecorp has climbed to nearly $1.5 billion - a lot of reasons to read the fine print.
