Mark Dampier: Hedge your bets on a stock picker

The Analyst

My fund for consideration this week is, essentially, an FSA-regulated version of a "hedge fund". Now I don't particularly like getting into the politics of hedge funds, which get an extraordinarily bad press, but I did get a letter from one client recently who described hedge funds as "an abomination". He went on to suggest that they were the root cause of all the problems in the financial sector.

That is simply not true. If anything, the hedge managers who, for example, "shorted" bank shares were the messengers telling the regulators and the politicians that something was wrong. The trouble is that the messenger almost always gets shot for bringing bad news. We should remember that even when the "shorting" of banks was banned their share price kept falling.

Cazenove Absolute UK Dynamic is a new fund that will be run by Neil Pegrum, who has over 20 years' experience and has been running a pure hedge fund for the last four years. This has averaged 15 per cent per annum, which is a quite remarkable performance given the volatility in the markets. The new fund will invest in UK shares with a bias towards medium-sized and smaller companies with around 30 to 60 stocks on each side of the balance sheet (i.e. "long" and "short").

Mr Pegrum adopts a stock-picking approach, a description I find leaves many investors scratching their heads. After all, isn't every fund manager a stock picker? Yes and no. Many managers have a more benchmark-orientated approach and are chiefly concerned with how much above or below the index weighting their investments are.

Mr Pegrum undertakes some 300 company meetings a year looking for ones he believes will do well. He tends to favour those with high barriers to entry and quality management, but then also looks for turning points which could materially affect the movement share price. In looking at shorts – stocks that he wants to sell – he uses the existing investment process, but somewhat in reverse. With those he is looking for stocks that are overvalued, where analyst forecasts might be wrong and where the business might be fundamentally flawed.

The fund will have no constraints in terms of exposure to individual sectors and will not borrow to invest. However, it can have gross exposure up to 300 per cent through a combination of long and short investments although, in practice, the fund's net exposure will not exceed 75 per cent. The overriding aim is to achieve an annual return better than 10 per cent over the long term, which is an ambitious but achievable target.

Clearly there are no guarantees in this world, but it seems to me that for those who want some kind of insurance in their portfolio – perhaps because you are nearing retirement or you just want to limit the potential downside – this is a fund to seriously consider. However, don't look for too long because I believe that Mr Pegrum will limit the size of the fund and will certainly be reviewing it if it reaches £100m.

The only thing about the fund that I don't like is the performance-fee structure, which is 20 per cent of all positive performance subject to a high watermark. It seems to me that, while cash returns are currently so low, we could be paying an extra fee for the manager simply matching cash returns. Performance fees are non-transparent and nor do I believe they align the interests of the investor and fund manager.

I wish, in fact, that performance fees didn't exist but the sad they are an entrenched part of the industry. I always try to consider funds on a case-by-case basis, and in some instances the strength of the investment process and the skill of the manager outweigh the negatives of a performance fee. After all, as in many aspects of life, sometimes you need to pay a premium price if you want a premium product. I will be buying some of the fund myself and expect to hold it through thick and thin for many years.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit

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

Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind-the-scenes to watch the latest series
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
Winchester College Football (universally known as Winkies) is designed to make athletic skill all but irrelevant
Life...arcane public school games explained
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
i100(and it's got nothing to do with the Great British Bake Off)
Angelina Jolie with her father Jon Voight
peopleAsked whether he was upset not to be invited, he responded by saying he was busy with the Emmy Awards
Bill Kerr has died aged 92
peopleBill Kerr appeared in Hancock’s Half Hour and later worked alongside Spike Milligan and Peter Sellers
news It's not just the world that's a mess at the moment...
footballPremiership preview: All the talking points ahead of this weekend's matches
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
Mario Balotelli pictured in his Liverpool shirt for the first time
Life and Style
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

    Data Scientist (SQL,Data mining, data modelling, PHD, AI)

    £50000 - £80000 per annum + benefits+bonus+package: Harrington Starr: Data Sci...

    SAS Business Analyst - Credit Risk - Retail Banking

    £450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

    Project Manager - Pensions

    £32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

    KYC Analyst, Birmingham - £200-£250 p/d

    £200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

    Day In a Page

    Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

    The phoney war is over

    Russian troops and armour pour into Ukraine
    Potatoes could be off the menu as crop pests threaten UK

    Potatoes could be off the menu as crop pests threaten UK

    The world’s entire food system is under attack - and Britain is most at risk, according to a new study
    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
    From Mozart to Orson Welles: Creative geniuses who peaked too soon

    Creative geniuses who peaked too soon

    After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
    Caught in the crossfire of a cyber Cold War

    Caught in the crossfire of a cyber Cold War

    Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

    Salomé: A head for seduction

    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
    From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

    British Library celebrates all things Gothic

    Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
    The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

    Is the Hard Rock Café worth fighting for?

    The restaurant chain's owners are currently embroiled in a bitter legal dispute
    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

    In search of Caribbean soul food

    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
    11 best face powders

    11 best face powders

    Sweep away shiny skin with our pick of the best pressed and loose powder bases
    England vs Norway: Roy Hodgson's hands tied by exploding top flight

    Roy Hodgson's hands tied by exploding top flight

    Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
    Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

    Di Maria and Ronaldo: A tale of two Manchester United No 7s

    They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

    America’s new apartheid

    Prosperous white districts are choosing to break away from black cities and go it alone