tmmonline.nz  |   landlords.co.nz        About Good Returns  |  Advertise  |  Contact Us  |  Terms & Conditions  |  RSS Feeds

NZ's Financial Adviser News Centre

GR Logo
Last Article Uploaded: Thursday, March 28th, 10:13PM

Investments

rss
Investment News

Are hedge funds a seperate asset class?

Frank Russell's Andy Turner looks at the vexed question of whether or not hedge funds are an asset class, and how should they be used in a diversified portfolio.

Monday, October 22nd 2001, 11:58AM

by Philip Macalister

Hedge funds are proving to be very popular with investors in New Zealand and around the world at the moment.

Two of the key questions advisers and investors should be asking are: Are hedge funds a separate asset class and how should they be included in a well-diversified portfolio?

Frank Russell's Tacoma-based manager of investment policy and research Andy Turner is quite clear that hedge funds are not a separate asset class.

To determine whether an investment type, or group, can be called an asset class it needs to be compared against six key criteria.

  1. To be an asset class the investments need to be conceptually similar securities. He says hedge funds fail this test as they can include a wide away of securities, including equities, bonds, currency, commodities etc.
  2. There needs to be high correlation between the various investments within an asset class. Again hedge funds fail, primarily for the same reason they failed the first test. Hedge funds can include a wide range of securities, consequently there is little correlation.
  3. The asset class, or wannabe asset class, has to be material. Turner is in no doubt that hedge funds are material as there is more than US$1 trill invested in the area. If debt, or leverage, is included the figure is probably considerably higher.
  4. An asset class has to have a good set of available and reliable data. Turner says one of the problems with hedge funds is that much of the data is either missing or at best suspect, so it's impossible to make comparisons on a level footing. (More on this later).
  5. An investor should be able to invest passively in an asset class, that is buy an index. "Dream on," Turner says about hedge funds.
  6. The final characteristic of an asset class is that it has to be something new, and exclusive. Turner says hedge funds don't pass this test as they are just another way of investing in the so-called traditional asset classes, such as shares and bonds. "Hedge funds are double counting a significant number of other assets."

On Turner's count hedge funds only pass one of these six tests, so they can't be considered a separate asset class.

"They don't stack up very favourably." Turner says.

How then, should an investor include hedge funds in a diversified portfolio?

Turner's view is that because hedge funds aren't an asset class they shouldn't be used in a strategic asset allocation.

"We think (hedge funds) are out in terms of your strategic asset allocation," he told delegates at Frank Russell's Australasian conference last week.

Although Turner raises some concerns about hedge funds from an asset allocation point of view, he is not saying don't use them.

"For some people we think these are a good idea."

Those investors maybe ones who have larger percentage of their money in equities.

For people who don't have a lot of shares, they there are better, more risk controlled options for ramping up returns.

« Ethical investing: Watch out for the coming waveKing builds an empire »

Special Offers

Commenting is closed

 

print

Printable version  

print

Email to a friend

Good Returns Investment Centre is brought to you by:

Subscribe Now

Keep up to date with the latest investment news
Subscribe to our newsletter today

Edison Investment Research
  • Electra Private Equity
    27 September 2021
    Introducing Hostmore and Unbound brands
    On 16 September, Electra Private Equity (ELTA) issued a trading update for its largest remaining hospitality brands, Fridays and 63rd+1st, and named the...
  • European Assets Trust
    21 September 2021
    Performance, income and a well-balanced portfolio
    European Assets Trust (EAT) aims to achieve long-term growth of capital through investments in smaller European companies (excluding the UK). EAT’s...
  • Georgia Capital
    13 September 2021
    Value creation on the back of macro recovery
    Georgia Capital (GCAP) posted a 13.2% NAV total return (TR) in local currency terms in H121 (15.2% in sterling), driven by an improved operating performance...
© 2024 Edison Investment Research.

View more research papers »

Today's Best Bank Rates
Rabobank 5.25  
Based on a $50,000 deposit
More Rates »
About Us  |  Advertise  |  Contact Us  |  Terms & Conditions  |  Privacy Policy  |  RSS Feeds  |  Letters  |  Archive  |  Toolbox  |  Disclaimer
 
Site by Web Developer and eyelovedesign.com