An interesting statistic emerged this week from a meeting with Philip Gibbs, one of the top fund managers at Jupiter Asset Management, and one of those whose fortunes I follow with particular interest. A former financial analyst at one of the investment banks, he has put together what is an impressive track record since being persuaded to make the move into fund management six years ago.
One of the funds he looks after is a conventional unit trust called Jupiter Financial Opportunities which, as its name suggests, largely consists of stocks in the banking, insurance and speciality financial sectors. This fund has risen something like 250 per cent since it was launched six years ago, and comfortably sits amongst the top ten performers in the entire universe of unit trusts (some 1,500 or so).
A second fund he manages is a split-capital investment trust, though it is not one of those caught up in the highly leveraged "magic circle" whose problems have done so much damage to the reputation of Aberdeen Asset Management and others in recent months. (It is worth pointing out that because of the implicit gearing in many of the worst offending trusts, the recent recovery in the stock market, if sustained, may yet bale out some of the hapless investors who were persuaded to buy the worst-offending splits, albeit for the wrong reasons. This may be why you have not heard so much about this particular scandal in recent weeks).
Finally Mr Gibbs looks after a hedge fund that is also doing well. It is up some 150 per cent since its launch, though its performance this year, in common with most hedge funds, is much more modest than the stock market as a whole. As a general proposition, it is fair to say that the performance of hedge funds, as it is meant to do, looks a lot less impressive when the market is rising than when it is falling.
The interesting statistic that caught my eye, however, concerns the sales figures of these respective funds. Like all fund management groups, Jupiter has been in a tough battle to keep sales of funds moving during the bear market. Even a top-performing fund like Financial Opportunities has struggled to attract much support from investors. It is said that a high proportion of fund management groups are losing money, caught with high fixed costs and drops in revenue.
But the hedge fund that Mr Gibbs runs has been going gangbusters as investors flock into this fashionable new sector. It has outsold the Financial Opportunities Fund by a ratio of about 20:1 over the past year. In fact, it appears the amount of new money that has poured into the hedge fund in the last year is almost as great as the market value of the conventional unit trust, notwithstanding the fact that the latter has one of the best track records around and has outperformed the hedge fund by a factor of three to one in the past nine months.
What are we to make of this interesting outcome? One thing it shows is that, while money continues to pour into funds on the basis of past performance, the volumes involved can still be dwarfed by a fashion effect, where the smart money is deemed to be going. A second conclusion is that the fashion for hedge funds shows little sign of letting up. Mr Gibbs is just one of many who thinks that the hedge fund marketing phenomenon has a fair way to run.
Many pension funds are only now finally getting round to obtaining permission from their trustees to invest in these types of fund. At the same time the campaign to allow hedge funds to be packaged and sold to ordinary investors - traditionally they have been restricted to wealthy investors - is still just beginning to warm up. There is no doubt hedge funds are moving into the mainstream of acceptable asset classes.
Whether or not investors prove to be happy with this shift to broad acceptability is another matter. While hedge fund strategies come in many shapes and sizes, the one thing that most of them have in common is that they are primarily intended to be seeking absolute, rather than relative, returns. In other words, their primary rationale is not to maximise returns, or outperform the market, but to seek positive returns with minimal, or at least much reduced, risk to capital.
In many cases, this is what they have done. It is true that the failure rate of hedge funds is high: some do go belly-up, while others, probably rather more, simply wither and die because they are unable to attract sufficient funds to make them viable. Of those that do survive, it is fair to say that the majority probably do deliver what they promise: positive returns and capital preservation. The irony though is that, while absolute returns are what hedge funds are meant to be about, it is the fact that their relative returns have looked so good during three years of bear market that has largely, one suspects, driven their success as a marketing phenomenon. In practice some hedge funds are so risk-averse as to be almost comatose.
After fees, many hedge funds have barely delivered returns in excess of the yield on cash. When the stock market falls by 25 per cent in a year, it looks good to boast a return of say 6 per cent ("We outperformed the market by 31 per cent"), but when the market starts to recover, as it has done since March this year, it looks a lot less interesting. As with private equity, the trick is to get exposure to the best fund managers before everyone wants them.
The fact that hedge funds continue to prosper while strong performing equity funds such as Mr Gibbs's financial fund struggle to raise new money is probably a good sign for the market outlook, on the usual contrarian grounds. Mr Gibbs thinks, incidentally, that the stock market recovery since March probably has a fair way further to go, and has structured his portfolio accordingly. That means he is keen on a number of life insurance companies, on banks that are particularly geared to the performance of equity markets, and on speciality firms (including the hedge fund manager Man Group and one or two stock exchanges) whose fortunes depend, directly or in part, on a strong stock market. He is relatively cautious about retail property, insurance underwriters and mortgage banks. It is the hedge fund that continues to pull in all the cash, however.