Scott Spencer is one of a small but growing number of astute financial advisers who have recognised the advantages of including funds of hedge funds in private investors’ portfolios. Too often portfolios are still structured only with equities, bonds and cash.Spencer is right in pointing out what many in the hedge fund industry have been saying, often to an unreceptive audience – that hedge funds should be regarded as a fourth asset class, which when added to traditional portfolios can help protect the portfolio against negative returns. Additionally, they should lower the volatility, while maintaining or marginally increasing the total returns. Matrix has constructed two portfolios, a traditional one and one that includes hedge funds. The traditional portfolio is invested 65% in equities (represented by the FTSE 100 index), 30% in gilts (represented by the FTSE British Government 5-15 year gilt index) and 5% in cash (represented by the UK Libor index). The hedge fund portfolio has 30% in equities, 30% in hedge funds (represented by the CSFB Hedge Fund index), 30% in gilts and 5% in cash. >From December 31, 1993 to December 31, 2003, the traditional portfolio produced an annualised return of 5.98% with volatility of 9.98%, while the hedge fund portfolio returned an annualised 7.58% with volatility of 7.35%. These results reinforce Spencer’s decision to include funds of hedge funds in a portfolio where the client is looking for capital growth but is not willing to take on too much risk. Matrix manages three funds of hedge funds that exhibit very similar volatility and return characteristics to the Io Low Volatility and Key Hedge funds of funds in Spencer’s portfolio. Two of the Matrix funds have specific volatility targets to be no higher than the UK Gilt index. They are designed especially for the UK intermediary marketplace. The minimum investment is £10,000 and they all offer sterling-hedged share classes.