The Analyst: A foot in both camps can pay off

In my last column of 2007 I said that the outlook for 2008 was particularly cloudy. The majority of press comment has been generally gloomy and talks of housing recession on the back of the problems in the US. That said, we do know that UK and US interest rates are going to be reduced quite sharply this year probably by at least 1 per cent.

Equity markets have a considerable amount of bad news already priced in, so I think it would be wrong to be completely avoid the markets. As ever, we investors want everything – we want to participate in the market gains, but don't want to be around when it loses. In fact, what we actually want is a hedge fund.

Unfortunately the vast majority of hedge funds are not open to retail investors, nor are they open to intermediaries to market them as they are unregulated investments. A proper hedge fund will try to make absolute returns and preserve capital in downturns. The hedge funds that you often see hitting the press, usually because something horrible has gone wrong, are in fact not what I would really call hedge funds but more like out-and-out gambling funds. So it has been difficult for the retail financial industry in the UK to launch anything like a hedge fund.

However, there is one group that seems to have launched a genuinely alternative product: the BlackRock UK Absolute Alpha Fund. I admit to being a little sceptical when it launched on the back of the expanded UCITS III regulatory regime. I was concerned that the powers might not be enough to deliver the kind of absolute return fund that was being proposed. I'm happy to have been proved wrong so far, and Mark Lyttleton has done a cracking job managing the fund.

The fund attracted little attention during a raging bull market: an environment in which it is bound to underperform. It has really shown its worth during the volatility of 2007. The All Share went through a roller-coaster ride and finished up 5.3 per cent, but the Absolute Alpha Fund delivered a gain of 10.8 per cent with significantly less volatility.

This is the nearest thing I can find to a regulated hedge fund. It adopts four investment strategies. Firstly, traditional long positions where Lyttleton has strong conviction that a stock will rise. Secondly, synthetic short investing, where he has a strong conviction that the stock will fall. When searching for short ideas he checks for companies with poor fundamentals or where he can see a catalyst for a negative reappraisal of the stock.

The largest part of the portfolio is invested in the third strategy: pair trades. These are a combination of long and synthetic short investing. These are often employed for two stocks in the same industry, where Lyttleton believes that one company is likely to outperform another. Providing he gets this call right – that Stock A outperforms Stock B – then he will make money regardless of whether the stocks fall or rise. The fourth tool available to Lyttleton is cash; he has the freedom to invest up to 100 per cent of the portfolio in cash.

The portfolio is run with a total return mandate; the aim is to consistently produce positive returns. Because the long and short positions in the pair trades are equal, the combined bet has a net market exposure of zero; it is this that gives the fund its very low volatility compared to the market. Throughout the life of the fund its total net market exposure has typically been no more than around 15 per cent.

So where could this fit into a portfolio? I am tempted to suggest that funds like this could be core holdings. It will clearly under perform during a bull market, but its considered approach should lead it to deliver good long term returns in the hands of a capable manager. Compounded returns of 8 per cent will double your money in nine years.

The fund could also be used tactically if you feel you are clever at market timing. For example, after a bull run, a fund like this could be very useful in delivering capital preservation to Sipp and ISA portfolios during a downturn. It also has daily dealing now, which will make it much easier for investors to handle.

In conclusion, I believe the BlackRock fund gives investors a chance to have a foot in both camps. If you think the market might go up, this will, or should, participate in some of the market gains, although not fully in the big bull run. On the other hand, should the market take a downturn, it should preserve your capital and with luck, make a little bit. The fund could also be used as an alternative to bond investing, but it could also be used to dovetail with more volatile long-only funds, or more sector specific funds which should help to reduce the volatility of your whole portfolio.

The writer 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; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Arts and Entertainment
Lou Reed distorted the truth about his upbringing, and since his death in 2013, biographers and memoirists have added to the myths
musicThe truth about Lou Reed's upbringing beyond the biographers' and memoirists' myths
Ed Miliband received a warm welcome in Chester
election 2015
Life and Style
Apple CEO Tim Cook announces the Apple Watch during an Apple special even
fashionIs the iWatch for you? Well, it depends if you want for the fitness tech, or the style
Finacial products from our partners
Property search
  • Get to the point
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

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

    Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

    £50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

    Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

    £13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

    Ashdown Group: Training Programme Manager - City, London

    £40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

    Day In a Page

    NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

    Who's monitoring the outsourced NHS services?

    A report finds that private firms are not being properly assessed for their quality of care
    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
    How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

    How do Greeks feel about Syriza?

    Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
    From Iraq to Libya and Syria: The wars that come back to haunt us

    The wars that come back to haunt us

    David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
    Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

    Too busy to surf? Head to The Pool

    A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
    Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

    UK's Major Tum to blast off on a spice odyssey

    Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
    John Harrison's 'longitude' clock sets new record - 300 years on

    ‘Longitude’ clock sets new record - 300 years on

    Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
    Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

    Let the propaganda wars begin - again

    'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
    Why Japan's incredible long-distance runners will never win the London Marathon

    Japan's incredible long-distance runners

    Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
    Why does Tom Drury remain the greatest writer you've never heard of?

    Tom Drury: The quiet American

    His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
    You should judge a person by how they peel a potato

    You should judge a person by how they peel a potato

    Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
    Beige is back: The drab car colours of the 1970s are proving popular again

    Beige to the future

    Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
    Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

    Bill Granger cooks with fresh cheeses

    More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
    Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

    Shay Given: 'This FA Cup run has been wonderful'

    The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
    Timeless drama of Championship race in league of its own - Michael Calvin

    Michael Calvin's Last Word

    Timeless drama of Championship race in league of its own