Hedge funds go public

Date: Monday, March 26, 2007
Author: David Budworth, Times Online

The City watchdog is opening up this high-risk form of investment to a wider market. Report by David Budworth

Investors are being encouraged to follow the lead of the American investor George Soros, who made over $1 billion (£507m) speculating on the devaluation of the pound, as the City watchdog prepares to open up the risky world of hedge funds to a wider market.

On Tuesday, the Financial Services Authority (FSA) will publish proposals to allow funds of hedge funds to be more easily sold to private investors.

Until now, hedge funds — which use a range of strategies to make money whether markets are rising or falling — have largely been the preserve of institutions. The FSA’s plan will allow them to be marketed directly to private individuals.

Robin Gordon-Walker at the FSA said: “The British public is showing an appetite for hedge funds, so it would be better if this was done in a regulated way.”

This month the first hedge fund listed on the London Stock Exchange. BH Macro is what is known as a global-macro hedge fund, which uses techniques similar to those that made Soros a packet. They bet on big moves in global interest rates or economic trends.

The fund is not regulated by the FSA, so cannot be marketed directly, but it is covered by the London Stock Exchange’s listing rules and anyone can buy the shares.

Traditional fund-management firms are also getting in on the act. F&C, which has been managing investors’ money since 1868, is launching a fund of hedge funds in May which it hopes will return about 10 per cent per year.

But some commentators are worried that the FSA stamp of approval will tempt inexperienced investors into the sector who are unaware of the risks.

Traditionally, hedge funds were designed to be low-risk investments that protect your capital when the markets fall. Many funds still have this approach, but others have been taking big risks in the desperate chase for returns.

Mark Anson, chief executive of the influential fund manager Hermes, recently slammed some for generating “more noise than value”.

They are also renowned for their lack of transparency and high charges.

Roger Lawson at the UK Shareholders’ Association, a private shareholder campaign group, said: “Given the multiple fees that many funds charge, the only people who make serious money are the fund managers. Most private investors just don’t understand how they work.” The funds use a range of complex strategies to achieve their goal of “absolute” returns — making money even when the wider market is falling.

One of the most common strategies is “selling short”. If a hedge-fund manager thinks a share will fall, he or she can borrow it from an investment bank and then sell it. The aim is to buy it back at a lower price later and then return it to the investment bank, pocketing the difference.

Half the hedge funds use a “long-short” strategy, not always successfully. The average hedge fund rose 13 per cent last year, trailing the 18 per cent return from the average UK equity fund.