HEDGE funds have been on a bit of a crusade lately, grabbing headlines and attracting investors who are seeking returns in an environment where they are not exactly easy to find.
However, it seems odd that many people in the market are regarding hedge funds as a relatively new asset class when in actual fact they have been around as long as many of the industry’s more notable players.
A quick dig into the past shows that hedge funds were invented more than half a century ago, by an Australian journalist no less, Alfred Jones. His idea was to eliminate the market risk associated with holding a particular asset (his ‘long position’) by also owning a negative amount (a ‘short position’) of other assets.
But over time, the hedge funds that developed evolved into highly speculative and risky trading vehicles, targeted mostly at very high-net-worth investors.
The recent ‘arrival’ of hedge funds to Australian retail investors in many ways marks their reinvention back into a palatable format for the average investor.
Like Jones, the promoters of hedge funds today argue that their main benefit is not exuberant returns, but the ability to neutralise market risks in any market climate.
But will hedge funds, despite their recent pitch towards the mainstream, become an established asset class in the retail space populated by the majority of investors?
As pointed out in this edition, a number of obstacles stand in their way. These include the fact that hedge funds, reflecting their background, are not on many master trust menus. Also, while they are gaining more market and mind share, they are not well-known nor understood. Once again this is probably a result of their pedigree and the need for products like this to spend a long time in the market where they can be used through a few investment cycles.
The re-emergence of hedge funds also occurred as investment markets began to fall around the time of the tech wreck when planners were seeking safe havens.
Now with the market supposedly having hit its low point, will hedge funds keep the ground they have gained or will investors move back to the usual suspects of managed funds, property and fixed interest when the market booms?
There is no doubt hedge funds are a permanent fixture on the landscape, but don’t be surprised to see their place wane a little when markets begin to rise again.
