Chat: Questions about hedge funds answered

Question: How many funds does the Advantage Hedge Fund (AHF) invest in?
TOWER: The Advantage Hedge Fund invests into 20 funds. In the future further funds may be added.

Question: When did the fund start and what have returns been to date?
TOWER: The fund started in March 2002 but the underlying fund has been operating since December 1999. Returns as at 31 March 1.7% for the quarter, 6.7% for one year.

Question: Does Advantage Hedge replace GAM Multi trading?
TOWER: No the AHF does not replace GAM Multi-Trading. GAM Multi-Trading is a high risk high return fund.

Question: When will the GAM fund be shifted to a tax-efficient fund?
TOWER: GAM Multi-Trading is currently a NZ unit trust. The AHF is an Australian unit trust and will have some tax efficiencies for some NZ Investors.

Question: When do you expect to have the Australian unit trust AUT (tax-effective) structure available for GAM Multi-Trading?
TOWER: The GAM Fund is due to become an AUT in a few months time.

Question: How will investors switch to this new fund?
TOWER: Current GAM investors will be offered a switch and sent an investment statement for the new GAM AUT as soon as it is available.

Question: Should investors use both the Advantage Hedge Fund and the GAM fund in their portfolios?
TOWER: They complement each other.

Question: How likely is it that there will be a negative return in any month?
TOWER: Historically 85% of monthly returns have been positive.

Question: You say that in 85% of months there has been a positive return - is this after charges
TOWER: Yes, all performance figures are after management fees

Question: Is a negative return equally likely in up and down markets?
TOWER: Yes, returns are non-correlated to the markets.

Question: I note S&P have recently launched a hedge fund index. Will Tower be using this as a benchmark for its funds? (If no why not!)
TOWER: The S&P hedge fund index will not be used as a benchmark, as the objective of the fund is to get absolute positive returns regardless of market conditions.

Question: What are the benefits to clients to shift to the GAM AUT, or is it the same as the Advantage?
TOWER: The two funds mentioned complement each other in terms of style, the GAM AUT will offer increased tax efficiency for certain investors as against the GAM GIF

Question: What do you feel are the competitive advantages GAM and AHF funds have over other hedge funds in the New Zealand market?
TOWER: AHF is 100% hedged, both funds are open-ended with no fixed interest distortions. They have flexibility, liquidity, and are hedged to $NZ.

Question: Does investing in this fund have any negative tax implications for clients - especially charities and trusts, etc?
TOWER: This is a detailed question I suggest you speak with your tax adviser, there may well be but please confirm with your adviser

Question: Is there any currency hedging and what will be the impact of a rise in the New Zealand dollar
TOWER: The fund is 100% hedged against a rise in the New Zealand dollar.

Question: What is the current level of New Zealand dollar hedging in GAM Multi-Trading Fund.
TOWER: 50%

Question: When is the next date for accepting money into the Advantage Hedge Fund?
TOWER: 28 May

Question: When will the hedge funds be in PortfolioONE?
TOWER: GAM Multi-Trading is already available on Portfolio ONE. A hedge fund will always be available on Portfolio ONE.

Question: Given the forecasts and current momentum of the New Zealand dollar are GAM likely to increase the cover?
TOWER: This is a question for GAM, as the investment manager when and if they make a change we will let you know.

Question: What have funds flow into the AHF been like?
TOWER: Solid and pleasing.

Question: The policy range for cash is 0-20%. Who makes the call on the actual amount to be invested in cash, how is the call made, and what is the current allocation to cash
TOWER: Cash is only held for liquidity purposes.

Question: Can you briefly describe the different styles of the two funds. I understand GAM is into global macro and the AHF embraces more of the hedge fund strategies. Is this correct?
TOWER: Yes this is correct for GAM. AHF uses relative value, event-driven, and long short strategies that are generally less volatile than the global macro strategies that GAM use.

Question: Why is Tower introducing so many hedge funds?
TOWER: Hedge funds are good investments in the current market and offer further diversification.

Question: Can you provide some idea of what is a suitable allocation to hedge funds for a medium risk investor? I note some research that suggests quite high allocations.
TOWER: In today's teleconference Tower outlined its allocation of 0-35% depending on the level of risk the investor wants to take.

Question: I keep getting emails about 'cut-off' dates - is this fund close-ended?
TOWER: No. It is monthly priced - the cut-off dates are reminders to get applications in time. The next investment date is 28 May.

Question: You said only 10% of returns are taxable at an investor's rate, you also mentioned it's tax effective for certain investors. Can you clarify what type of investors are not part of this classification?
TOWER: Best to seek independent tax advice here. It will depend on an investor's individual circumstances.

Question: What's the suggested allocation of hedge funds in a portfolio? Should they replace equities?
TOWER: Tower's recommendation is 0-35% and that they should take a part of a diversified portfolio and not totally replace other asset classes.

Question: In the teleconference today David made some comment, I think, about using the Advantage Hedge Fund instead of global bonds. Could you expand on that a little more?
TOWER: Global bond returns looking forward are likely to be low, the AHF offers similar risk characteristics and the likelihood of higher returns.

Question: Why does the Advantage Hedge Fund have a $5,000 minimum, when your other funds have a $1,000 min?
TOWER: Customer research suggested that $5,000 was as reasonable minimum for a hedge fund, specialist asset class.

Question: $5,000 is a lot to a small investor trying to put together a balanced portfolio.
TOWER: If a $5,000 lump sum is not available investors can start at $250 per month with 24 months to reach the minimum investment level of $5,000.

Question: Is there anything else like global bonds that you can drop out or drop back on to fit a hedge fund into a portfolio?
TOWER: Look to reduce the other asset classes. The underlying allocation within AHF is 60% fixed interest and 40% equities. We would recommend reducing accordingly to accommodate AHF.

Question: Is there any information on your website about AHF? Where does it sit specifically on your site?
TOWER: If you go to invest.tower.co.nz there is an Advantage Hedge Fund banner that will take you to the What's New page, which has further information.

Question: Are there any leads being generated from your nationwide advertising? Are clients showing interest?
TOWER: Yes there has been a lot of interest and we are reprinting more Investment Statements to keep up with the demand.

Question: With regard to demand, have you at Tower feel that you have been reactive or proactive in producing this product? Was this a 'build it and they will come' type product?
TOWER: We are being proactive. We have offered a hedge fund in the New Zealand market for some time now and know of the benefits that such a fund can have for investors. The Deutsche (AHF) offering complements what we are able to offer clients looking for such a fund.

Question: Do you actually think that clients are actively looking for this type of investment option? Considering the complexity of the hedge funds I don't believe individual investors -- or even advisers for that matter -- fully understand the nuances of such an investment. Any comments?
TOWER: You are quite correct that these are more complex type of funds which is why we have taken the approach of trying to educate advisers and investors on hedge funds. We have produced material on hedge funds in association with Deutsche and will continue this educational approach especially as Richard said in the teleconference regarding developing the understanding of these types of funds.

Question: Suggested asset allocations from the likes of Morningstar are very low for hedge funds. Do you thing that advisors who stray too far from these open themselves up for liability down the track if they don't perform?
TOWER: Currently Morningstar are recommending an 11.5% underweight position for global bonds, preferring cash and equities. Many advisors are worried about equities, therefore where do you put your money? We are offering an alternative that has low underlying risk and potentially higher returns. It's the advisers' choice to stick rigidly with Morningstar or to look for alternatives. This is one.

Question: What sort of split do you recommend between the GAM hedge fund and the Deutsche (AHF) one?
TOWER: GAM is a more aggressive fund therefore more preferred for an aggressive investor. AHF is more defensive therefore recommended more for a conservative investor. However we recommended that both are included, as they complement each other.

Question: I have briefly looked at the investment statement and I must say I was interested in the management fee. As a ballpark figure what do you expect the MER to be? Is there a performance-based fee?
TOWER: The MER is likely to be 2.51% (gst inclusive). There is a 10% performance fee on the underlying fund managers.
Question: We are reaching the end of our scheduled time with this chat. I'd like to thank you all for being involved and Tower for answering the questions. An edited transcript of this chat will be posted on Good Returns soon. Philip Macalister - Good Returns.

TOWER: Thank you all for listening. Any more questions that you may have on the Advantage Hedge Fund please call 0800 486 937 and ask to talk to your Business Relationship Manager.