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Fund of hedge fund managers positive about future

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An increased appetite for alternative assets has heightened demand for investment company hedge funds, which currently have GBP6.8bn under management, but the sector has had a turbulent ride, according to research by the Association of Investment Companies. 

Despite being up four per cent over one year, it has underperformed the investment company sector average over five years where it made a loss of four per cent compared to the average investment company making a gain of 23 per cent. 

However, over a three year period, the sector has outperformed the investment company average by 12 per cent. The share price total returns have underperformed the investment company sector average over five years due to discount movements, however the NAV returns have been similar to that of the index average.

The AIC has spoken to investment company fund of hedge fund managers to gauge their views on the market and the outlook for the future. The managers do admit that it has been a rocky ride since 2008 and that the downturn of 2008/9 has created a heightened aversion to risk amongst investors. Nevertheless, they believe that the future is looking positive and the structure of investment company hedge funds should put them in a good position to perform well over the coming years. 

The managers believe that lessons from the downturn of 2008/09 have been learnt and that the hedge fund sector has bounced back well; however the sentiment towards hedge funds has room to improve.

Ana Haurie, group chief executive of Dexion Capital, says: “The fallout from the banking crisis and several issues specific to listed hedge funds made for a challenging time for the sector. Consequently, the average discount drifted out past 25 per cent by late December 2008. 2009 was a year marked by corporate activity for the listed hedge fund universe, as a handful of funds delisted and many more returned substantial amounts of capital to shareholders through tender offers and share buybacks. This has continued into 2010, especially for companies trading on wider discounts.” 

Following the credit crunch, investors have become more risk-averse. They are now looking for investments with greater transparency and ones that are covered by solid regulation. Many hedge fund investment companies have consciously returned capital to investors as well as putting in place discount control mechanisms. 

The biggest piece of regulation currently facing the investment company industry has been the Alternative Investment Fund Manager Directive. As the rules are still pending, a timetable for the introduction of the Directive has not yet been confirmed. However, the managers believe that one of the key implications of the regulations for investment company hedge funds might be the restriction on managers from outside the EU investing unless their regulators are in agreement with the EU authorities. 

The managers believe that the sector is working hard to narrow discounts although this will not happen overnight. The companies are fully aware that investors are increasingly risk-averse but believe that the investment company structure is able to suits these needs well. 

Sean Molony, senior investment specialist at IAM, says: “We expect market conditions in the equity and credit markets to become more constructive again for security selection which should particularly benefit long/short equity and credit managers. Economic and macro factors are expected to continue to create movements in the fixed income and currency markets which should provide a strong opportunity set for trading orientated macro managers. AIS currently has around 60 per cent of the portfolio invested in managers in these three strategies. We believe that the current discount levels on listed fund of hedge funds are too wide given the risk/return characteristics of funds such as AIS and expect discount levels to narrow to nearer the long-term average as good risk-adjusted returns are achieved.”

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