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Hedge Funds - not just for the super wealthy

Hedge funds have come along way since entering the limelight in 1997 with the near meltdown of Long Term Capital Management (LTCM), but many investors still struggle to understand them.

No longer are hedge funds the high-risk investments favoured by the wealthy.  Hedge funds are now being structured using a diversity of strategies, and covering every risk profile from ultra conservative to speculative.

What are hedge funds?
Hedge funds are actively managed investments that aim to produce returns in both rising and falling markets through the use of a broad range of securities and investment techniques. 

The techniques they use may be different to methods employed by traditional fund managers as the funds have greater scope to use derivatives, short positions and exotic securities.

This means hedge funds will be independent from the movements in indices such as the All Ordinaries or Dow Jones. This has made hedge funds effective for diversification and for reducing portfolio risk.

Depending on the investment strategy employed by the fund manager, investors may receive returns in the form of income, capital appreciation, or a combination of both. 

Listed hedge funds
Other developments in the industry include listed hedge funds.   Pengana Capital, GoldLink Capital and Wallace Funds Management all operate ASX listed funds, providing an additional level of transparency, supervision, and access than unlisted funds.   Generally hedge fund investors can be locked into investments that they are unable to exit for six months to one year.  Their listed equivalents allow investors to exit funds within transaction plus three days (T+3) and at a known price. 

How to find out more information
With a vocabulary of terms including global macro, pairs trading, and convertible arbitrage, the industry has adopted more jargon than most extreme sports. For those with an appetite, resources have become available to assist in understanding hedge funds.

The ASX website is a good place to start to learn more about the basics of Hedge Funds. The website hosts a large amount of useful information about Hedge Funds, including a booklet produced by funds rating agency ASSIRT and the Alternative Investment Management Association (AIMA) detailing the different strategies employed and how hedge funds can be included into an investment portfolio. 

Aegis Equities Research has also recently published their Listed Managed Investments Quarterly for February 2005, which includes an analysis of some of the listed hedge funds mentioned below.

Company name ASX code Strategy For more information:
Pengana Managers PGN Invests in new or recently formed hedge fund managers (Hedge fund-of-fund) www.pengana.com.au
GoldLink IncomePlus  GLI  Identifies long-term investments to capture arbitrage opportunities from yield curves in interest rate and commodity markets (primarily gold).    www.incomeplus.com.au
Wallace Absolute Return WAB Identifies mispriced securities and take advantage of relative under or over performance www.wallacefunds.com.au
 

© All rights reserved 2005. This material is educational and it is not intended to constitute financial advice.

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