Don't bother to hedge your bets

Hornby right on track, but take some profits
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So is that it for the hedge fund industry? You might think so if yesterday's dramatic Footsie rebound heralds the bottom of the bear market, then it would also signal the high tide for the investment boom in hedge funds. These monstrously complicated funds have boasted about their ability to profit from shares going down, and have attracted controversy for being the main practitioners of short-selling. Record sums have been pumped in for the ballooning numbers of hedge fund managers to play with. If the tide is to turn, what now for the retail punter who has been toying with a hedge fund investment?

So is that it for the hedge fund industry? You might think so if yesterday's dramatic Footsie rebound heralds the bottom of the bear market, then it would also signal the high tide for the investment boom in hedge funds. These monstrously complicated funds have boasted about their ability to profit from shares going down, and have attracted controversy for being the main practitioners of short-selling. Record sums have been pumped in for the ballooning numbers of hedge fund managers to play with. If the tide is to turn, what now for the retail punter who has been toying with a hedge fund investment?

Actually, the decision process should be little changed, whether the market rallies or the bear persists. It is still fiendishly difficult to invest in hedge funds and very high risk.

It is misleading to think of hedge funds as another asset class, to rank alongside equities, bonds and the like. The funds are another way to invest in these assets run by active equity managers, only with more freedom to play fast and loose in the markets. There are as many different strategies as there are funds, some making giant bets on international markets and currencies ("global macro" strategies), others working in single sectors buying or shorting shares. The oldest strategy ("market neutral") involves buying shares in one company and shorting shares in a rival, hoping the market will spot a difference in quality or price between the two.

To reduce risk, private investors will almost certainly want a fund of funds, but those traded on the UK market, including Henderson's Absolute Return Portfolio and Deutsche Bank's HedgeFirst, trade at a discount to assets and look unexciting. There is no yardstick by which to guess what returns might be expected in future. After a decade of double-digit returns, hedge funds appear to have managed just low single digits in the last two years. Many think it is because more managers are chasing the available "market neutral" and arbitrage opportunities.

Private investors will want an established and secure name – funds of funds by GAM or Man Group are favourites – but what are these funds investing in? Many established hedge fund managers are unable to take new money, and the latest crop are unproven.

If this isn't reason enough for keeping clear of hedge funds, try the minimum investment needed to get into a retail-friendly fund (still as high as £10,000 in most cases) or the lack of regulation and disclosure, high charges (10 to 20 per cent of profits, plus an annual fee), or poor tax treatment of gains. Avoid.

Hornby right on track, but take some profits

Chug, chug, woo, woo. That's the sound of Hornby picking up steam as the British maker of model railway sets and Scalextric racing kits continues to prosper. The shares motored on another 6p to 523.5p yesterday after this rejuvenated company issued another upbeat trading statement.

Sales of both Hornby and Scalextric were strong in the run-up to Christmas, meaning Hornby is now expected to beat market expectations for the year to 31 March. Robert Baird Securities, the house broker, has upped its profit forecast from £4.8m to £5.2m.

Hornby restructured its operations some time ago, shifting manufacturing to third parties in low-cost China and concentrating its energies on research and development efforts and marketing.

New product is starting to flow through from the toy workshops, with the launch of a Hornby Virtual Railway that is played on a CD-Rom. Also ready to go is the Scalextric Challenger where a player can race against a car guided by an in-car computer which memorises the track and can then take the circuit at maximum speed. It is perfect for single children or little-uns who can't persuade dad to play with them.

Harry Potter continues to be a factor in the company's magical performance, with ranges such as the Hogwart's Express accounting for 5 per cent of group sales. Growth is also coming from the new Scalextric Sports where the track is much easier to clip together and sales of Scalextric cars have almost doubled after more detail was included. Everything has been lifted by having more concessions in department stores.

It all sounds great but the huge rise in the shares, up from just 117p three years ago, urges caution. The price-earnings multiple of 11 is not overly cheap given earnings growth in 2004 will be about 11 per cent. More growth could come from overseas markets such as the US where sales are growing strongly from a low base – helped by US Scalextric models of Mustangs and Chevys. A good company but it is worth locking in some profits after such a good run.

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