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Expat Investor : July August 2007
expatinvestor.com 24 EXPAT INVESTOR July/August 2007 FIRST PERSON NEWS Ravi Anand, director, New Star, answers the often-posed question, what exactly is a hedge fund? The first known hedge fund was set up as long ago as 1949, yet the world of hedge funds still has an air of mystery for most people. This is in part due to the fact that it is such a generic term, covering a wide range of strategies and portfolio management techniques. It is also because the hedge fund world used to be exceedingly elitist, with the client base mostly comprising wealthy individuals and institutional investors. Just as the techniques and strategies have grown and developed, so too has the client base, with hedge funds as an asset class becoming increasingly accessible to the small investor. It is estimated that there were about 10,000 hedge funds worldwide at the start of this year and that assets within the asset class had broken through the $2 trillion barrier for the first time. In a nutshell, the term hedge fund is based on the idea that managers can 'hedge' their bets to ensure a profit, regardless of whether the financial markets go up or down. Unlike long-only fund managers, hedge fund managers can profit from the weakness of financial securities as well as their strength, provided that their investments go in the direction they had anticipated. Other defining characteristics of hedge funds include their tendency to be domiciled offshore, in the Cayman Islands or Bermuda for example, performance-based fee structures and their pursuit of absolute returns rather than outperformance relative to an index. Whilst there is no set guideline for categorising hedge funds, hedge fund indices use classifications such as convertible arbitrage, dedicated short, emerging markets, equity market neutral, event driven, distressed, risk arbitrage, fixed income arbitrage, global macro, long/short equity, managed futures and multi-strategy. It is important to understand the differences between these various hedge fund strategies because it is such a broad asset class. The different hedge fund strategies can involve a considerable number of management techniques that can be employed while investment returns, volatility and risk vary enormously. Some strategies that are not correlated to equity markets are able to deliver consistent returns with low risk of loss, while others may be more volatile. They have the potential of delivering higher returns but the risk of loss is greater. The largest strategy is equity long/short, which accounts for approximately 30% of all hedge fund assets. Many long-only managers move into the hedge fund world via this strategy because it is not far removed from long-only investment: an equity long/short strategy involves a hedge fund manager taking long positions in equities that are viewed as under- valued and short positions in equities that are viewed as over- valued. Multi-strategy is another popular hedge fund strategy, accounting for approximately 10% of the asset class. The investment approach is diversified by employing various strategies simultaneously, allowing an investor to obtain diversification through this one investment alone. Investing in single-manager hedge funds, however, is still not easy for the private investor. This is because minimum investments often start at $100,000 and many of the longer- running, successful hedge funds are closed to new investment. The use of funds of hedge funds is, therefore, an increasingly popular route, because funds of funds are often more easily accessible to private investors, with the minimum investment normally considerably lower at about $5,000. They diversify investment returns through investing in a range of different hedge funds, giving investors access to a wide range of investment strategies. The idea is that the manager of the fund of hedge funds selects suitable funds on the investor's behalf, removing the difficulty of trying to find top-performing hedge fund managers and at the same time removing the risk of being exposed to only one hedge fund. Whilst the choice of funds within the fund of hedge fund will determine the returns and the volatility, they generally offer much lower risk than a single hedge fund. In addition to fund of hedge funds, investable hedge fund indices such as the RBC Hedge 250 Index offer diversified exposure to the hedge fund asset class with limited selection bias. This blending of different strategies aims to provide a more stable long-term investment return than that generated by any of the individual funds. Investors must consider what their personal risk/return profile is to decide which strategies and management techniques suit their risk/return objectives. Hedge funds are often considered to be risky investments because people mistakenly believe that all hedge funds are volatile. This is because hedge fund managers can leverage their portfolios, a technique that may have the effect of magnifying exposures, creating greater degrees of movement and volatility. Hedge funds, however, employ leverage in a risk-controlled fashion, with many using derivatives to achieve this. Hedge funds are the only asset class that can offer investors consistent absolute returns, with low correlation to equity markets. They are flexible in their investment options and benefit because hedge fund managers' remuneration is heavily weighted towards performance incentives. Not surprisingly, they attract some of the best brains in the investment business. To find out more about hedge funds from New Star, enquire through the fast facts number below. Measuring up to a good hedge fund bet Fast Facts 66490 According to Yo r kshire Bank's research, more than one in ten parents are considering downsizing their home once their children leave the nest so they can free up funds to enjoy their old age. However,for some, downsizing could be a distant dream. Approximately one in four parents of young children think that should house prices continue to rise, their children will be in their mid thirties before they can afford to move out and buy their own property. One in seven parents are so concerned by this they have even started a home fund to help their newborn children take their first steps onto the property ladder in later life. Gary Lumby, Yorkshire Bank's Head of Retail, says, "With the current pensions crisis, climbing down the property ladder could provide one solution to parents who have little savings but are looking to retire and improve their lifestyle. "It's also encouraging to see so many parents are looking ahead, seeing how the property market is going and taking actions to prevent their children having to live at home longer than expected. Some may even be downsizing to free up funds to help their children onto the Empty nesters use property to fund retirement property ladder." Inheritance tax Yo r kshire Bank's research also revealed that even when the kids do move out, downsizing may not be an option. One in ten are considering ways to minimise paying inheritance tax in their later years by moving parents or grandparents into their home. This will enable them to sell their property and combine their assets at the same time. What type of investor are you? Investors can now determine their own personal investment profile and tap into the asset allocation expertise of the UK's largest mutual fund manager. Fidelity International has launched its Investor Profile Tool which can be found at www.fidelity.co.uk/direct/inde x.html. Self-directed investors who visit the global emerging markets to boost the potential for higher returns. Again, this investor will then be offered the chance to choose from the full range of funds in those asset classes which are available through Fidelity FundsNetwork. It's also easy for investors to move between the different suggested asset allocation models so they can understand what happens if they select a less or more risky option. Richard Wastcoat, UK Managing Director, explains, "By introducing the Investor Profile Tool, we are making our asset allocation expertise much more accessible to self-directed investors faced with the difficult decision of where to invest... Investors can make sure that their asset allocation reflects not only their investment aims but also matches their attitude to risk. "We believe that asset allocation that fits with investment goals is key to investors avoiding disappointment. However, determining the right allocation can be daunting for many people. "At Fidelity FundsNetwork, we have always designed our services with the aim of making investment easy for the consumer, and by introducing the Investor Profile Tool, we are now bringing Fidelity's asset allocation expertise to everyone." The eight investor profiles according to Fidelity International are: Cash, Cautious, Conservative, Balanced, Adventurous, Speculative, Cautious income, and Adventurous income. Men managed to set aside around £15.25 billion in savings accounts last year, earning some £457.6 million in interest alone.However, in stark contrast, women could only manage to save £9.9 billion last year, earning approximately £297 million in interest, reports AXA. The new findings show that men out- saved women by 1.5 times in 2006, setting aside around £5.3 billion more than women in total. And, AXA says, this amounts to a loss of £160.64 million in interest payments for women who couldn't save as much as their male counterparts. The AXA research has revealed that the average saver set aside £1,003.20 last year. However, while the average man parted with £1,206.50, the average woman only had an extra £794.89 to save - £411.61 less than Savings gender gap men. Colin Nelson at AXA, comments: "It is good news to see so many people setting aside money in short or medium term savings... However,women are falling some way behind. "While £411 a year doesn't sound like much, after only five years the average woman's savings pot would be over £2,000 smaller than a man's -- not to mention the lost interest. "Saving is a good habit to get into if you can afford it. This country's buy now, pay later attitude can't be sustained forever, so if you can save to buy you will be in a far better financial position in the long term." AXA says the current savings landscape is perfect for people looking to build a savings pot, with many providers passing on rate rises prompted by the recent Bank of England base rate increases. Fast Facts 66491 Fast Facts 66492 site can now choose from eight different risk profiles to match their savings goals, time horizon and attitude to risk. Once they have selected their risk profile, the Investor Profile Tool then shows them a suggested optimum breakdown of assets, as well as a range of funds that may be appropriate on Fidelity FundsNetwork. A 'balanced' investor, for example, is someone who wants to invest money for more than five years but is uncomfortable with the value of their investment fluctuating significantly over this time. The Tool will then suggest an asset allocation breakdown across money markets, equities, property and bonds to achieve moderate growth with low risk. Fidelity International has more than a decade's experience in managing funds of funds which invest across multiple asset classes. Investors are invited to take advantage of this expertise either through investing in Fidelity's range of multi-manager funds, funds of funds or now through the use of the Investor Profile Tool to design their own portfolio. However, a 'speculative' investor is likely to be one who wants to invest over a much longer time period and is happy to ride out short-term fluctuations in the pursuit of long- term capital growth. In this case, the Investor Profile Tool may suggest spreading the investment across property and shares, including some exposure to