Hedge funds deserve place in portfolios

Hedge funds are receiving more interest from research houses, financial planning groups and investment platforms and have earned their place in investment portfolios, according to Bennelong Funds Management chief executive Jarrod Brown.

He said that institutional investors were already aware of the diversification and risk management benefits of hedge funds, but their long-term performance and lower risk was of particular note.

Brown said that data from Australian Fund Monitors (AFM), which tracks more than 200 Australian-offered hedge and absolute return funds via its Equity Fund Index, found that hedge funds outperformed the S&P/ASX 200 Accumulation Index over a 10-year period.

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"From January 2003 to June 2013, the AFM Equity Fund Index returned 11.53 per cent compared with 9.22 per cent from S&P/ASX 200," Brown said.

"When the usual measure of risk, standard deviation was calculated for the two indices, the AFM Equity Fund Index came in at 7.88 per cent per annum, whereas the S&P/ASX 200 was 13.41 per cent per annum."

Brown said that when measured by Sharpe Ratio, hedge fund investors received more than twice as much reward for each unit of risk when investing in the AFM Equity Fund Index as opposed to the S&P/ASX 200 Accumulation Index.

He said local hedge funds also benefitted from lower fees and regulatory requirements for transparency in how they are charged.

"The AFM data shows that Australian hedge funds are generally cheaper than offshore-based funds. The average fee charged on funds in the AFM database was 1.3 per cent per annum for management, whereas the typical formula for overseas funds is ‘2 plus 20', which means a 2 per cent management fee and a 20 per cent performance fee if performance hurdles are met."

Given this, Brown said it was highly likely that retail investors would be attracted to hedge funds. He said research houses, financial planning groups and investment platforms had expressed confidence in the sector — which had increased interest and access to the funds.

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