LONDON: Regulation of hedge fund managers by Britain’s Financial Services Authority (FSA) has boosted the industry’s appeal to institutions such as pension funds, London-based Aspect Capital said.
Anthony Todd, chief executive officer at Aspect, said risk perceptions had changed in recent years because most hedge fund managers were now registered with the FSA.
“Five years ago many investors shunned the industry. They saw it as the Wild West,” he said.
“The FSA has done an excellent job of raising the barriers and it’s a far more robust industry now ... It has become more palatable to institutions.”
Institutions including life insurance firms account for much of the new money that has been invested in hedge funds in recent years. Globally, the industry is now estimated to manage around $1tn compared with around $500bn five years ago.
Many new investors like pension funds are looking to diversify from stock markets after the 2000 crash and want absolute or real returns, instead of relative returns based on benchmark indexes, to cover their deficits.
But some still worry that most hedge funds are domiciled in lightly-regulated, low-tax offshore centres like the Cayman Islands or the Bahamas.
“That doesn’t make them more risky,” Todd said.
Most hedge funds are domiciled offshore because they want to be able to use leverage to boost returns, derivatives to control risks and short sales, which allow a manager to borrow stock and sell it on the expectation of buying it back cheaper.
That gives them an advantage over traditional fund managers, who are restricted by European rules in the tools they can use.
Investors should understand the different risks posed by various hedge fund trading strategies, Todd said.
Global macro hedge funds are generally seen as riskier because they rely more on the skills of a manager and returns can be more volatile, while returns from strategies that use computer models are likely to be less volatile.
“There are hedge fund strategies out there that are more conservative than long-only bond investing,” Todd said.
There is a wide spectrum of risk, just as there is for traditional fund managers, he said.
“At the conservative end (of traditional fund management) you’ve got bond or cash funds and at the racy end you’ve got things like technology funds which have demonstrated their high levels of risk over the past five years.”
Aspect manages around $2.8bn of assets. Three of its hedge funds trade futures, one is a Japanese equity fund, one is a European equity fund. The sixth is a multi-strategy fund that invests in the company’s other hedge funds.
Futures are traded on margin, where only a proportion of the cost of the contract has to be paid, so Aspect normally has around 75% of its assets in cash or securities which can easily be turned into cash.
The average return of the six funds for the half-year to end-June is about 4.75% net of fees, above industry averages between 1 to 2%. The MSCI index of world stocks over the same period was down 0.4%.
The funds use statistical models based on factors such as interest rates, bond yields, analysts’ earnings forecasts, earnings revisions and price-to-earnings ratios. – Reuters |
