Are Chinese whispers damaging hedge funds?

According to a survey byHedge Funds of Australia(HFA), today’s advisers regard hedge funds as a mainstream investment option for capital preservation and income growth and are supporting this view with their investment choices.

While HFA managing director Spencer Young says the results show hedge funds are no longer perceived as speculative vehicles, half the advisers surveyed said they still need to improve their knowledge of hedge fund strategies.

Chairman of the Alternative Investment Management Association (AIMA) Damien Hatfield says reversing ill-conceived views of hedge funds is as easy as discussing the issues from a practitioner’s perspective.

“I do a lot of presentations to advisers who have been picking up little snippets of information on hedge funds, most of which are wrong. When I sit them down and explain simply what a hedge fund is, and the modest levels of leverage most funds actually use, they’re amazed,” Hatfield says.

“When it gets down to it, a hedge fund is just a slight step out of the box from the traditional asset management area. But most advisers think [hedge funds] are something much more convoluted and complex than they really are.”

Young agrees most people are missing the basic concept of hedge funds.

“The first, most basic concept that has to be understood is there are various products which are vastly different to each other, including single strategy funds, diversified fund-of-funds, and concentrated or single strategy fund-of-funds,” he says.

Young says many of the misconceptions regarding hedge funds are caused by the entire sector being tarred with one brush, a criticism he levels squarely at the media.

“When the press write about hedge funds they talk about them as a generic vehicle, but people within the industry who refer to hedge funds should qualify their comments with what kind of fund, product or strategy they are referring to.”

Hatfield, however, believes the confusion is simply a by-product of a maturing sector.

“It’s just that the whole area is new, and it’s an early stage learning process,” Hatfield says.

“But it does place real pressure on AIMA and the hedge fund industry to educate planners as to the simple structure of a hedge fund.”

Hatfield says AIMA is currently rolling out education programs and working with education conference organisers in order to combat the case of industry Chinese whispers.

AIMA is also developing a workshop with theAustralian Financial Markets Associationfor super fund trustees, however, Hatfield says the focus is shifting from a solely super fund trustee issue to include planners.

Like AIMA, HFA runs education programs and seminars nationwide, which focus on the history of hedge funds, the various products and strategies available, the pros and cons of those investments, where they should be used and what the common risks associated with them are.

Between the two groups and various other industry providers, the adviser education must be paying off.

Young says this month HFA has brought in more than $20 million from the adviser and direct retail community, with around 95 per cent of that via advisers.

Hatfield agrees over the last six months in particular “there has been a real bubbling of interest coming out of financial planning and the retail sector”.

“A lot of good work is being done, particularly byAssirtandvan Eyk, who have written papers on hedge funds and are recommending hedge fund allocations to retail advisers.”

Those asset allocations are still relatively conservative, with the research houses recommending smaller proportions of around 5 to 10 per cent be allocated to hedge funds in portfolios. Young says while most advisers are taking that advice, there is still a level of hedge fund placement variation in portfolio construction.

“If they’re using a highly diversified fund-of-funds, which is a fairly low volatility product, then some are actually using [hedge funds] as a core and then putting traditional equities around it, which is fantastic. Others are using it as a dampener to take volatility out of their existing portfolios,” Young says.

Hatfield says: “Retail investors who have exposure to a hedge fund strategy when traditional assets turn around and start to run on the upside are willing to accept a lower volatility return — which is what hedge funds, particularly fund-of-funds, will provide, rather than the volatility of traditional assets.”

The question now is how long it will take for the misconceptions and hearsays about the various types of hedge funds to be replaced with facts and figures, and how much longer before they are being used to their best advantage.

But Hatfield is optimistic about the future.

“It’s still early days but the message is starting to get out there, we are getting it into the marketplace,” he says.