My asset Allocation

Fund Strategy wrote in June this year of the excessive number of hedge funds in the marketplace today and the inevitable slowdown in the returns attainable. I have therefore deliberately chosen to be contentious in choosing four hedge funds and am convinced that the increasing maturity of this particular industry will lead to the better groups coming to the fore.

Whilst researching this article, I was surprised at just how long some of the managers had been involved in this area. For example, City Fund Management’s senior management team has worked together since 1969 and Absolute Fund Management has had experience in investing in hedge funds since 1993.

My portfolio this time is for a sophisticated investor who wishes to invest an additional £200,000 into his pension fund but is particularly concerned about the potential for rising interest rates in the US and a possible devaluation of the dollar following the presidential election in November. My obsession with the US budget deficit was further reinforced by the recent statement from the Russian Federation that it was now demanding payment for its oil and gas supplies in euros. My clients in the oil tanker business have increased my conviction that the recent rise in oil prices has been driven not by speculative positions taken by hedge fund managers but by a continuing surge in demand for oil – particularly from China.

My first choice is therefore a new fund started by Platinum Capital Management called Premier which specialises in investing in UK, EU and US government securities and intends to take advantage of fluctuating yield spreads, particularly by sticking to short-term fixed income arbitrage contracts. Platinum managing director Craig Reeves has used City Fund Management as the underlying fund managers because of its outstanding track record over the past five years in producing returns for Platinum of between 10% and 15% with no losing months. This fund was designed for both low volatility and low risk with no leverage.

My next choice is a classic fund of hedge funds run by Charles Hovenden of Absolute Fund Management. Like the previous fund this is also an absolute return fund and diversifies risk by investing in a variety of about 40 hedge funds covering varied geographical regions and fundamentally different investment strategies. This fund has outperformed cash, equities and bonds since its performance record began five years ago and has produced a positive return in more than two out of ever three months where the FTSE World index has fallen.

My third fund is the Thames River Hedge + fund run by Ken Kinsey-Quick. This is a fund of hedge funds using both directional and non-directional hedge-style managers. I like its emphasis on protecting capital as well as making money – apparently based on Warren Buffett’s dictum that avoiding investment holes is more important to achieving superior risk-adjusted returns than trying to chase higher returns.

My last choice is the Hyde Park fund run by Jupiter’s Philip Gibbs – who, of course, runs Jupiter’s Financial Opportunities fund and whose track record is second to none.

Whereas high net worth clients were the traditional hedge fund investors in the early 1990s, their assets have declined in this sector from 70% to 50% and more assets now come from sophisticated institutional investors throughout the globe. It is inevitable that this sector of the industry will continue to be driven by talented individuals joining from large fund management groups to pursue a more individual career path.