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Funds of hedge funds can reduce risk for retail investors, says adviser

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Financial advisory firm Killik & Co believes that including funds of hedge funds in self-invested personal pensions and ISA portfolios may help UK investors safeguard capital and reduc

Financial advisory firm Killik & Co believes that including funds of hedge funds in self-invested personal pensions and ISA portfolios may help UK investors safeguard capital and reduce risk.

The firm argues that the performance of the London-listed fund of hedge funds sector should go some way toward altering the perception that hedge funds are only for the wealthy elite due to the minimum investment levels required.

Whilst direct investment in individual hedge funds are likely to continue being a riskier strategy and face higher barriers to entry, Killik says that while the risk of funds of hedge funds is diluted, they still produces absolute returns over time with less volatility than equities – holding true to the traditional meaning of hedging as a way to protect against stock market declines.

‘ISA and SIPP qualifying absolute return funds using hedging strategies, such as Close AllBlue, made a net asset value gain of 5 per cent in the first quarter despite the FTSE falling 8 per cent during the same period,’ says director of fund research Mick Gilligan.

Killik notes that many UK investors have built up significant savings over the years in tax-sheltered products such as ISAs but have been unable to hedge their market exposure because HM Revenue & Customs deems most hedge fund products to be ineligible for ISA inclusion.

However, the emergence of a hedge fund sector on the London Stock Exchange and the wider hedging powers of unit trusts and open-ended investment companies now offer real choice to the private investor.

‘A London market listing now makes it possible for a number of these hedge funds to be held in ISA accounts,’ Gilligan says. ‘The ability to move ISA money into hedge funds as a means of diversifying risk and reducing portfolio volatility should not be overlooked.’

He acknowledges that funds of hedge funds may not be appropriate for every investor, but says that the ability to diversify risk beyond the traditional investment market has become more pressing when stock market returns have been particularly volatile.

Killik & Co offers financial planning, investment management and stockbroking services to private clients, as well as corporate services including share scheme administration and executive counselling. Founded in 1989, the firm operates from 11 branches around London and an international office in Dubai, and oversees some GBP3bn in assets for more than 25,000 private clients.

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