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

Sarah Silverman (middle) with sister Reform Rabbi Susan Silverman (right) and sister actress Laura Silverman (left) at Jerusalem's Western Wall for feminist Hanuka candle-lighting ceremony
peopleControversial comedian stages pro-equality Hanukkah lighting during a protest at Jerusalem's Wailing Wall
Arts and Entertainment
The Bach Choir has been crowned the inaugural winner of Sky Arts’ show The Great Culture Quiz
arts + ents140-year-old choir declared winner of Sky Arts' 'The Great Culture Quiz'
Life and Style
food + drink
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

    $200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

    Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

    $125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

    Sheridan Maine: Commercial Finance Manager

    Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Sheridan Maine: Regulatory Reporting Accountant

    Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Day In a Page

    Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

    Homeless Veterans appeal

    In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
    Could cannabis oil reverse the effects of cancer?

    Could cannabis oil reverse effects of cancer?

    As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
    The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

    The Interview movie review

    You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
    Serial mania has propelled podcasts into the cultural mainstream

    How podcasts became mainstream

    People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
    Jesus Christ has become an unlikely pin-up for hipster marketing companies

    Jesus Christ has become an unlikely pin-up

    Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
    Rosetta space mission voted most important scientific breakthrough of 2014

    A memorable year for science – if not for mice

    The most important scientific breakthroughs of 2014
    Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

    Christmas cocktails to make you merry

    Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
    5 best activity trackers

    Fitness technology: 5 best activity trackers

    Up the ante in your regimen and change the habits of a lifetime with this wearable tech
    Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

    Paul Scholes column

    It's a little-known fact, but I have played one of the seven dwarves
    Fifa's travelling circus once again steals limelight from real stars

    Fifa's travelling circus once again steals limelight from real stars

    Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
    Frank Warren column: 2014 – boxing is back and winning new fans

    Frank Warren: Boxing is back and winning new fans

    2014 proves it's now one of sport's biggest hitters again
    Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

    Jeb Bush vs Hillary Clinton

    Karen Tumulty explores the power dynamics of the two first families
    Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

    Stockholm is rivalling Silicon Valley

    The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
    Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

    Crucified Santa: Urban myth refuses to die

    The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
    Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

    The Boy in the Dress: On set with the stars

    Walliams' story about a boy who goes to school in a dress will be shown this Christmas