Is the Hedge Fund Fee Frenzy a Furphy?
A cursory glance at the Index table on www.fundmonitors.com gives a stark reminder that while the fees charged by hedge and absolute return funds might be high compared with their "long only" counterparts, and higher again still than the increasingly popular ETF sector, you only get what you pay for.
YTD to the end of October equity based funds in AFM's database have returned 10.66% after all fees, against the ASX200 Accumulation Index (AI) which has returned a meagre 0.53%, and 12.39% over 12 months against a fall of 0.74% for the ASX200 (AI). So while it is easy for the detractors of hedge funds due to their higher fees, and performance fees in particular, when calculating the total cost of those fees to the end investor, the choice would seem pretty simple: Either pay for performance, or pay the price.
Certainly the performance of different funds varies, which is where research, and the ability of the underlying manager comes into play, but 80% of funds have outperformed the ASX200 YTD, and over 12 months that climbs to 83%. It would seem on the surface that the worse the market does, the better hedge funds do by comparison.
Putting aside individual skill for a moment (which we generally do not advise) the reasons behind the out-performance seems pretty obvious. The ability of a fund with a flexible investment mandate, including the ability to short sell, move to cash, or protect investors' capital using risk averse option strategies, provide a clear advantage over those funds which are forced to remain in the market come what may (ETF's), or have limited flexibility in overall stock, sector or asset allocation (long only, index aware).
Figures in today's AFR showed the rise of allocations to ETF's in particular, but why an investor, or their advisor would choose to do so escapes me. Sure the fees are minimal, and certainly they get market performance, but that's not much benefit when the market is going nowhere - or worse.
Price isn't everything: Quality and performance is, otherwise we'd all be eating hamburgers and pizza, and drinking vino collapso out of a cardboard box. So before making a decision based on the cost of an investment product, consider the value of the investment, risk of capital loss, and performance in both positive and negative markets.
Performance updates and reviews received this week included the following PERFORMANCE UPDATES:
FUND REVIEWS released this week: Morphic Global Opportunities Fund; Bennelong Kardinia Absolute Return Fund; Jamieson Coote Bonds Active Fund; Meme Australian Share Fund; Bennelong Long Short Equity Fund
And on that note, I trust you have a safe and enjoyable week-end.
Regards,
Chris
CEO, AUSTRALIAN FUND MONITORS
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