Hedge funds are all the rage but look increasingly as if they are going to be the unit trust industr...
Hedge funds are all the rage but look increasingly as if they are going to be the unit trust industry's answer to with-profits and life policies.
Everything Autif and the major investment groups have highlighted as wrong with life and pensions could be said about the alternative investment strategies that are now mushrooming.
Do any of the following sound familiar: high fees, complex or opaque charging structures, and an industry run by and on behalf of professionals rather than for the end user?
These are all areas where the unit trust industry has taken the moral high ground when it comes to with-profits or life and pensions companies. They are all charges which will be made against hedge funds.
The retail investment market is beginning to clog up with that worrying combination of the enthusiast, convert and self-confessed expert, underpinned with little practical knowledge. This is the mindset of countless thousands who have unknowingly been agents of mis-selling over the years.
The unit trust industry cheerfully admits hedge funds are the way forward because they are high margin products. So can it justify those extra fees?
The arrival of the performance fee as the norm is certainly an attraction for the provider and anyone who calculates TERs. But it doesn't seem that great a deal for consumers: managers look as if they are going to be paid extra for doing their job, getting better than average returns.
Surely if you are on a straight percentage deal then in real terms that fee grows as the assets under management rise. It is how renewal commission works.
In addition why should investors pay so much for a product which is intended to outperform cash? If, as we have all be told, equities do better than cash, then why pay so much to underperform the stock market?
There is a place for hedge funds and there are some good hedge fund managers out there but the current unreflective enthusiasm for them is worrying. When you buy an alternative investment strategy are you buying a well-managed portfolio, run by a highly trained individual with years of experience who has consistently justified being paid high fees by producing even higher risk-adjusted returns?
Remember the last time a unit trust house really decided it knew how to play around with derivatives? It was called Foreign & Colonial's Higher Income Plan. It paid out 10%, it couldn't go wrong....
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