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Demystifying Hedge Funds

In this Special Report Good Returns provides readers with a detailed user-friendly package of information all about hedge funds and alternative investment strategies. The report also provides you with detail of what funds are available in the New Zealand market.

Saturday, September 1st 2001, 11:43PM

by Philip Macalister

After years of being the forgotten investment option in New Zealand hedge funds are suddenly having their day in the sun.

The two managers who have stuck with hedge funds, Tower Managed Funds and OM Strategic, are recording very strong funds flows on the back of good returns and their persistence with the funds.

But they don't have the market to themselves anymore, as other players including Deutsche, AXA, FGI Asset Management, Frank Russell and Challenger have either recently rolled out funds or are on the cusp of putting hedge funds into the market.

What's happening in New Zealand isn't an isolated event. According to US research company Cerulli Associates the hedge fund industry is on a huge roll. It says that last year hedge funds industry assets grew by more than 44% from 1998 to US$450 billion. What's more the industry was reporting stronger growth than the mutual fund industry in the US.

Currently there are estimated to be about 6500 hedge funds internationally, and on average a new one is being launched every day in the US.

In New Zealand the story of hedge funds has been nice idea, but why bother?

The research houses have been split on the merits of hedge funds. Morningstar (and its predecessor FPG Research) has always been in favour of using them as a risk diversifer. At one stage it even included hedge funds into its asset allocation model which was used at its conferences.

IPAC Securities (now FundSource) has taken the opposite view. It argued against hedge funds saying that essentially they were a zero-sum game and picking winners was too hard.

In the market a lack of interest has led to some people pulling their products, while others have believed in the story, pushed the idea, but had limited support - until now

For many years an outfit called Momentum tried to promote its hedge funds, but with little success, leading to the decision to withdraw them from the market several years ago.

HCM Global has also had a fund in the market, however support for this fund has been thin and performance has been patchy.

The big player in the New Zealand unit trust market, and the most successful one, has been Tower Managed Funds (TMF) with the GAM Multi-Trading fund.

Tower's decision to perserve with the fund is now paying dividends. In the quarter to June 30 the fund was one of its top two products in terms of funds flow and it is now attracting up to $2 million a week in new money.

Currently the fund has about $120 million under management, it has a strong track record and both research houses rate it highly.

However, Tower has not had the market to itself. Australian-based OM Strategic (formerly Ord Minnett) have for a number of years been promoting its OM IP 220 series of closed-ended, capital protected Australian funds.

OM Strategic split the money between a number of hedge managers, and fixed interest investments. The fixed interest component is none to make sure that at the end of the investment period it has the money to pay back investors all their capital, no matter what happens to the money invested with the hedge manager.

OM Strategic have never disclosed how much money they have pulled out of New Zealand. However, the most recent offering several months ago was understood to have taken about $40 million from New Zealand.

Clearly the success of Tower's Multi-Trading fund and OM Strategic's OM IP220 series shows that there is a growing thirst for these types of products.

TMF general manager distribution Richard Baker acknowledges that the Multi-Trading fund has been a bit of a sleeper.

He puts this down to two reasons. First up these sorts of funds are complex and quite hard to explain to investors. What's more hedge funds were a "dirty" word, thanks to the high-profile collapse of Long Term Capital Management, and the winding up of George Soros' Quantum fund and Julian Robertson's Tiger Asset Management.

Because of their complexity, and the fact that there were "equivalent or superior substitutes" in terms of risk and returns (eg; international and US share funds), investors looked past hedge funds.

Baker says because the world share markets have been going backwards for nearly a year attention has focussed on hedge funds and alternative investment strategies as they continue to perform well.

He says the popularity of hedge funds also represents a further maturing of the New Zealand investment scene. He says maturation goes through several phases. The previous one was the acceptance by investors and fund managers that they needed to invest a significant portion of their money offshore. The next one, he says, is that more sophisticated funds, such as hedge funds, will become a regular part in a diversified portfolio.

Baker also acknowledges that TMF is going to come under competitive pressure in this area with other managers rolling out hedge funds in New Zealand.

To counter this TMF is looking to "reinvent our trading fund over the next two months."

He says these changes will take the Multi-Trading fund to the next level of evolution while other managers are coming in at the first stage.

These changes will be structural and will include an expansion of the number of managers the fund uses.

The 10 commandments of hedge fund investing
Hedging your bets: Why hedge funds should be part of your portfolio
Hedge Funds: The next essential asset class
Tower's GAM Multi-Trading Proves Its Worth
Hedge Funds: Alternative funds or mainstream investments?
How do hedge funds work?

You can read Philip's blog here: http://www.goodreturns.co.nz/blog/

« Hedge Funds - The next essential asset classHow do hedge funds work? »

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