Leading hedge: the funds that thrill or faze us

They're elaborate and expensive but they're attracting more interest as investors try to ensure they don't lose money. Sam Dunn reports

Fiendishly complex, frighteningly expensive and hidden offshore away from the City regulator's prying eyes, hedge funds have been the sort of financial products that keep investors awake at night. Get them right, however, and they can be the stuff of dreams: some investors have doubled their money in a year.

Financial advisers have recently reported a surge in interest in a financial instrument that was once the preserve of the fabulously wealthy. After years of unreliable stock market returns for more orthodox products, hedge funds have crept on to mainstream investment radars. "Their popularity stems from the bear market," says John Turton, director of life and pensions at independent financial adviser (IFA) Bestinvest. "Investors are asking how they can avoid losing money again."

They may be growing in popularity but ask someone in the street what a hedge fund is and you are likely to get a blank look. This isn't surprising, as hedge funds can't be marketed to the average investor because the Financial Services Authority (FSA), the City regulator, deems them too risky. The usual way to buy them is through a specialist broker or adviser.

Those who have heard of the funds usually connect them with George Soros, the billionaire financier who forced the UK out of the European Exchange Rate Mechanism in 1992 by betting on the falling pound. But today's hedge funds tend to be run by young traders and researchers aiming to make annual returns of at least 8 per cent. And you can now buy into them for as little as £3,500.

As their name suggests, the funds are designed to "'hedge" the risk of making investment mistakes in markets. Their aim is simply to produce absolute returns - to get more back than you put in.

To do this, they adopt strategies betting on different financial or geopolitical outcomes. For example, they might look to profit from decline by "shorting" - borrowing shares to sell in the hope of buying them back later at a cheaper price. Others might pounce on price movements between commodities such as sugar or cotton. Or they might buy shares in both Vodafone and Orange to cover themselves against poor individual company performance but still benefit from a general uplift in the telecoms sector.

Traded offshore in countries such as Bermuda, many hedge funds can only be bought in dollars, although the FSA is con- sidering ways to make it easier for UK companies to set up similar operations.

While they may sound complicated, the case for hedge funds is straightforward, says Mr Turton at Bestinvest. "The problem is that most people are scared of them. But if you buy them as part of a portfolio - perhaps as a fund of hedge funds - to counter the risk of pure equity investments, they do have a place."

Such an investment must be considered with great care, though, as costs can be prohibitive and each fund's approach to risk is difficult to pin down. Be prepared for three tiers of charges: an initial fee to buy in; annual management costs; and performance fees that can be up to 20 per cent of any profits. "High-performance funds will have high performance fees. Investors need to check all these costs," says James Higgins, a director at broker Chamberlain de Broe.

It can cost as much as 5 per cent of the amount you are investing to buy into a hedge fund, but if you use a stockbroker or specialist IFA, expect to pay no more than 0.75 to 1.5 per cent. Annual charges should be around 1.5 per cent.

Many funds have exit dates only once every three months, or less, and there may be currency risks and extra penalties too. "Three months is a long time to wait, particularly if your money is in another currency," warns Mr Higgins. "Witness the recent fall in the dollar."

Exactly how many hedge funds are in existence is debatable but Mr Higgins believes the figure is close to 4,000. Earlier this month, Thames River Capital launched Hedge+, which required a minimum investment of £3,500. It has already closed to new investors, although you can still invest by purchasing shares on the stock market. The fund invests in other hedge funds and aims for 8 per cent growth a year.

So you think you'd never invest in these products?

Hedge funds can seem an alien concept for investors seeking a simple, transparent product, yet some employees may already have savings in them. Occupational pension schemes might invest in the funds, for example, if they fit the mandate of the scheme's trustees.

However, a pension fund needs reliable income to be able to pay out to past staff and build up reserves for current workers. This clashes with the unpredictable nature of hedge fund performance. What's more, as the funds are based overseas and use derivatives and other opaque investments, they are often too risky for trustees. Sophisticated investors planning for their retirement with a self-invested personal pension can also buy into them.

The FSA has looked at making it easier for hedge funds to be set up here, but tax and income complications are delaying the process. A question mark also hangs over the behaviour of some hedge fund managers, with US and UK investigations continuing into allegations of profiteering at the expense of savers.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Voices
The Sumatran tiger, endemic to the Indonesian island of Sumatra, is an endangered species
voicesJonathon Porritt: The wild tiger population is thought to have dropped by 97 per cent since 1900
News
news
Arts and Entertainment
Story line: Susanoo slays the Yamata no Orochi serpent in the Japanese version of a myth dating back 40,000 years
arts + entsApplying the theory of evolution to the world's many mythologies
Life and Style
Popular plonk: Lambrusco is selling strong
Food + drinkNaff Seventies corner-shop staple is this year's Aperol Spritz
PROMOTED VIDEO
News
Gardai wait for the naked man, who had gone for a skinny dip in Belfast Lough
newsTwo skinny dippers threatened with inclusion on sex offenders’ register as naturists criminalised
News
Shake down: Michelle and Barack Obama bump knuckles before an election night rally in Minnesota in 2008, the 'Washington Post' called it 'the fist bump heard round the world'
newsThe pound, a.k.a. the dap, greatly improves hygiene
Arts and Entertainment
La Roux
music
Arts and Entertainment
Graham Fellows as John Shuttleworth
comedySean O'Grady joins Graham Fellows down his local Spar
News
people
News
Ross Burden pictured in 2002
people
News
Elisabeth Murdoch: The 44-year-old said she felt a responsibility to 'stand up and be counted’'
media... says Rupert Murdoch
Arts and Entertainment
tv
Extras
indybest
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Data Governance Manager (Solvency II) – Contract – Up to £450 daily rate, 6 month (may go Permanent)

    £350 - £450 Per Day: Clearwater People Solutions Ltd: We are currently looking...

    Java Developer - Banking - London - Up to £560/day

    £500 - £560 per day: Orgtel: Java Developer FX - Banking - London - Up to £560...

    HR Business Analyst, Bristol, £350-400pd

    £350 - £400 per day + competitive: Orgtel: My client, a leading bank, is curre...

    Account Manager - (Product & Account Management, Marketing)

    £26000 - £30000 per annum + Benefits: Ashdown Group: Account Manager - (Produc...

    Day In a Page

    A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

    A new Russian revolution

    Cracks start to appear in Putin’s Kremlin power bloc
    Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

    Apartheid’s sadistic killer that his country cannot forgive

    The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
    Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

    Standing my ground

    If sitting is bad for your health, what happens when you stay on your feet for a whole month?
    Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

    Greene prays for chance to rebuild after injury agony

    Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
    Israel-Gaza conflict: Secret report helps Israelis to hide facts

    Patrick Cockburn: Secret report helps Israel to hide facts

    The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
    The man who dared to go on holiday

    The man who dared to go on holiday

    New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
    Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

    Best comedians: How the professionals go about their funny business

    For all those wanting to know how stand-ups keep standing, here are some of the best moments
    The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

    The Guest List 2014

    Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
    Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

    Jokes on Hollywood

    With comedy film audiences shrinking, it’s time to move on
    It's the best of British art... but not all is on display

    It's the best of British art... but not all is on display

    Voted for by the British public, the artworks on Art Everywhere posters may be the only place where they can be seen
    Critic claims 'I was the inspiration for Blanche DuBois'

    Critic claims 'I was the inspiration for Blanche DuBois'

    Blanche Marvin reveals how Tennessee Williams used her name and an off-the-cuff remark to create an iconic character
    Sometimes it's hard to be a literary novelist

    Sometimes it's hard to be a literary novelist

    Websites offering your ebooks for nothing is only the latest disrespect the modern writer is subjected to, says DJ Taylor
    Edinburgh Fringe 2014: The comedy highlights, from Bridget Christie to Jack Dee

    Edinburgh Fringe 2014

    The comedy highlights, from Bridget Christie to Jack Dee
    Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

    Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

    The woman stepping down as chair of the Heritage Lottery Fund is worried