One stands while others burn
Trading funds may be getting a bad name in some quarters, but in others they are really starting to prove their worth.
Sunday, November 8th 1998, 12:00AM
Trading funds may be getting a bad name in some quarters, but in others they are really starting to prove their worth when markets are volatile.
London-based Global Asset Management (GAM) private client director Richard Worts is unashamedly proud to promote trading funds and their benefits to investors. While New Zealand investors have been slow to embrace trading funds, they are becoming more widely used overseas and becoming a mainstream asset class.
Worts says they should always be included in a diversified portfolio, and their weighting should increase during periods when markets are fickle.
A "normal" weighting maybe around 5 per cent of a portfolio's assets, but in times like the present that can be increased to between 10 and 15 per cent, he says.
Trading funds, often more commonly known as hedge funds, use specialist managers to actively, and aggressively, buy and sell bonds, commodities, equities, index options and futures and foreign exchange markets.
The primary objective of the manager's analysis is to achieve capital growth irrespective of conditions in conventional equity and bond markets, while maintaining highly disciplined risk control.
By themselves trading funds sound risky, but when included in a well-diversified portfolio they have the effect of lowering overall volatility as essentially they have a very low correlation with other asset classes.
Worts says by including trading funds in a portfolio an investor can end up with a smoother ride, while at the same time enhancing returns.
GAM runs the $30 million Tower Multi-Trading Fund and the Tower Global Gateway fund which are promoted by Tower Managed Funds in New Zealand.
In the two years to September 30 the trading fund has posted a 25.74 per cent return while the $32.5 million Global Gateway fund has done 18.4 per cent.
While the benefits of trading funds are simple, managing these vehicles is complicated and requires discipline.
Worts says there are good and bad trading funds. The bad ones generate the headlines with their losses, while the good ones have a relatively low profile.
Worts says the reason he can comfortably promote hedge funds, when others are having trouble is that GAM has stringent downside risk controls and it is extremely fussy about who it picks to manage the funds.
Currently GAM use 33 trading managers worldwide, out of a pool of 6000 that the group researchers.
"There are only 33 out 6000 managers that we will trust with other people's money," he says.
Worts says the typical trading fund success ratio is 85 per cent (with a standard deviation of 7.2 per cent) in a falling market and 35 per cent in a rising market.
In a recent trip to New Zealand, Worts suggested a new investor should consider having up to 15 per cent of their portfolio invested in trading funds, 20 per cent in cash, a further 20 per cent in bonds and the remaining 45 per cent in selected international equities. (He doesn't suggest this is what an existing portfolio should be switched to, rather it for someone starting out).
He views trading funds as sitting alongside cash and bonds as a safe haven for money, especially when markets are extremely volatile.
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