Demystifying Hedge Funds

The two managers who have stuck with hedge funds, Tower Managed Funds and OM Strategic, are recording very strong funds flows on the back of good returns and their persistence with the funds.

But they don't have the market to themselves anymore, as other players including Deutsche, AXA, FGI Asset Management, Frank Russell and Challenger have either recently rolled out funds or are on the cusp of putting hedge funds into the market.

What's happening in New Zealand isn't an isolated event. According to US research company Cerulli Associates the hedge fund industry is on a huge roll. It says that last year hedge funds industry assets grew by more than 44% from 1998 to US$450 billion. What's more the industry was reporting stronger growth than the mutual fund industry in the US.

Currently there are estimated to be about 6500 hedge funds internationally, and on average a new one is being launched every day in the US.

In New Zealand the story of hedge funds has been nice idea, but why bother?

The research houses have been split on the merits of hedge funds. Morningstar (and its predecessor FPG Research) has always been in favour of using them as a risk diversifer. At one stage it even included hedge funds into its asset allocation model which was used at its conferences.

IPAC Securities (now FundSource) has taken the opposite view. It argued against hedge funds saying that essentially they were a zero-sum game and picking winners was too hard.

In the market a lack of interest has led to some people pulling their products, while others have believed in the story, pushed the idea, but had limited support - until now

For many years an outfit called Momentum tried to promote its hedge funds, but with little success, leading to the decision to withdraw them from the market several years ago. Read More