West End-based Matrix Group is no stranger to investment innovation. It was a pioneer in business ex...
West End-based Matrix Group is no stranger to investment innovation. It was a pioneer in business expansion schemes, enterprise zone property unit trusts and enterprise investment schemes and has a strong pedigree in the venture capital trust market. More recently, it added offered packaged funds of hedge funds (FoHFs) to its list of firsts in the UK retail market.
Today, hedge funds are still finding their feet but are fast gaining in popularity among UK retail investors. So much so, the FSA is looking at opening up the market in the new year. Perceptions were somewhat different when Matrix set about launching the first UK IFA-designed FoHF product in 2001, says Matrix director Bridget Guerin.
"We wanted to launch the fund with a manager that had the equivalent status of Fidelity in the long-only world. We needed a large, steady company with lots of resources," she says.
Matrix settled on Tremont Capital Management to run its Conservative Approach Strategy fund. It has a target volatility of no greater than the UK Government 5-15 year bond index and is marketed to IFAs as a fixed income alternative. Tremont is one of the world's largest managers of its type, it has a relatively large research capability, with 126 staff, and over the last 20 years it has built up US$8bn under management.
The fund uses the full range of hedge fund strategies. Since launch, it has yielded an average 0.49% per month, providing an annualised return of 5.97% with low correlation against equities (0.47) and gilts (-0.16).
As public and adviser acceptance grew, Matrix added to the range with the Horizon fund, designed to match equity returns without the risk. To date, the fund's strategy of investing in a minimum of 15 uncorrelated hedge funds has yielded 7.51% annually, with an equity correlation of just (0.42). It is one of Matrix's best sellers, partly due to the fund's London-based boutique-style manager, Mo Zayan, meeting IFAs to explain what he is doing.
With markets jittery, Matrix looked further down the risk/return profile to create a market neutral fund with less risk than the Conservative Approach portfolio, selecting Gottex Group's Market Neutral fund as its lower risk fund of funds (Fof). Hitherto, the US$6.3bn Gottex Group had only marketed its products to institutions, leaving the fund out of reach to ordinary investors.
Guerin says: "In 2006, it has not had a single down month, while others have floundered." As a result of its low correlations, the Gottex fund has averaged 9.43% pa (since June 1999) and is up 4.66% in the year to the end of July 2006. Last year, Matrix added two more higher risk funds to its range: Generator, managed by Vega Asset Management, and Orbit, a concentrated version of the Horizon fund. The Generator has the highest risk/return profile of the current range and generates its returns from trading in fixed income and currencies, while the Orbit fund is a higher risk, higher return version of Horizon concentrating on between 10 and 15 underlying hedge funds.
This year has proved a busy one, with a new fund added as well as new closed-end vehicles to widen the appeal of the entire range. The new Max fund is managed by Sandra Manzke of MAXAM Capital Management, enabling UK private investors to gain access to one of the most experienced Fof managers in the world.
In response to demand from IFAs for Fof products that were subject to capital gains rather than income tax, it launched closed- end versions of the Max and Horizon funds. The closed-end funds invest 100% in the open-ended funds, so the performance of each structure should be the same.
The number of firms using Matrix packaged FoHFs is growing steadily as both advisers and clients become more familiar with the concept. Most funds are added to portfolios for diversification away from the more traditional assets of equities, bonds, cash and property. Rather than being obscure niche products, more and more advisers consider FoHF as core components.
"The exposure in a portfolio is generally anything from 5% to 25%. This should not come as too much of a surprise when one considers that endowment funds in the US hold anything up to 70% in hedge funds," says Guerin.
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