High-net-worth individuals and institutional investors have been using “absolute-return” strategies for some years now.
The concept of making money regardless of the direction of investment markets used to be the exclusive domain of hedge funds, but fund management groups have understandably been keen to launch these strategies into the retail market.
The Ucits (Undertakings for Collective Investment in Transferable Securities) regulations allow retail fund managers to use some hedge fund strategies.
But Luke Newman, of fund manager Gartmore, has urged potential investors to establish a fund management group’s credentials before parting with their cash. He said: “Gartmore has been using long/short strategies for 10 years. It’s not necessarily the same skill set that is required to manage money in this manner. You need different risk controls.
If you buy a company on a ‘long-only’ basis – that is, you buy it to make money if it goes up in value – the most you could lose would be your investment.
“If you sell a stock short, your potential loss is unlimited if it keeps rising. We have controls to prevent this.”
Gartmore launched the UK Absolute Return Fund in April 2009 using the experience gained from the Alphagen Octanis hedge fund.
“Hedge funds per se got a bad name due to leverage. Ucits III limits the use of leverage.
“What we’re trying to do is deliver positive returns each year regardless of the market direction.”
Despite the intrigue surrounding how hedge funds make their money, Mr Newman said: “What’s under the bonnet of our fund is very simple. We’re buying large well-known companies. In a traditional long-only fund, it can be very frustrating to find companies that you think are going to fall in value and not be able to profit from it.
“Last year we were able to reflect our negative views on the UK domestic banks whilst also buying global banks like HSBC.”
As evidence of the effectiveness of the strategies used by Gartmore, 2008 provided the toughest possible test for its Alphagen Octanis Fund, on which the UK Absolute Return fund is modelled. It returned 29.4% at a time when the FTSE All Share index plummeted by 29.9%.
Barry O'Neill is a chartered financial planner with Thomson Shepherd and can be contacted on 01224 619215