Smarter investing - hedging

robatwork

Hi,

Most of the way through Tim Hale's "classic" and it's obviously published a while ago as he mentions Lehman Brother in one of the possible investments!

Nevertheless I am finding it a fascinating read. He also mentions a couple of the "damping" possibilities are in hedge of hedge funds, and commodities. And the fact that the only low cost funds at the time he wrote were in the USA.

Is that still the case or are there some nice low cost funds available here now that anyone would care to point me to so I can research further?

many thanks

innovate

Check out http://monevator.com/category/investing/passive-investing-investing/

Same sort of principle, but with a lot more current information.

Michael_Nottingham

Yes there are now a lot of low cost trackers available in the UK including some from Vanguard, HSBC and others.

There is loads of information on Monevator, including investing on a budget here, low cost tracker list here and a summary of the different fund platforms here

Please note with the recent RDR changes, there are lots of moves in charges and separately ongoing new fund launches, so worth keeping an eye on things and reviewing say every 6 months to ensure that you are still in the best / cheapest option

Sorry Innovate - didnt mean to cross post!

bowlhead99

I think Innovate and Michael might be missing the point a little?

The question was not really "what cheap index trackers can I get and on what platform" (suggestions of HSBC or Vanguard and the platform links provided by Michael) or "is there a book or website which follows Tim Hale's philosophy but is updated more frequently" (to which I'd agree Monevator is a great answer).

So far as I can see, the OP was only specifically looking for guidance on a couple of areas noted by Hale, within the range of asset classes that would dampen the volatility produced by standard equity trackers.

These include bonds (for which there are loads of cheap trackers around) and a couple of specific alternatives which are the point of the question, such as hedge fund-of-funds (which attempt to blend/diversify the result you would get from investing in any one individual hedge fund, to which you probably wouldn't get access anyway as a retail punter) and commodities futures as an inflation hedge. Along with real estate and international equities, Hale refers to these classes as 'return smoothers'.

In terms of commodities funds, there are a couple way down the 'tracker list' linked above by Michael. There was also a thread on the same subject last week here with no obvious no-brainer conclusion on what to buy. It can be difficult to decide how broadly to define the commodities universe and in what proportion different commodities should be held to achieve the result of being uncorrelated with equities markets. Trackers are cheap but views differ on how well they work.

Hedge funds (often marketed as 'absolute return funds') aim to produce a target positive absolute return over time rather than one which is correlated with equity markets, even though they do take equity positions. It is a broad sector with individual hedge funds employing a myriad of complex strategies, including for example derivatives like swaps and currency hedges, and at a point in time may be either long or short or both in different stocks at the same time.

This allows them to profit in a down market, rather than just buying and holding a set of companies as an equity tracker does (being long-only) where in a down year, a long-only investor would make losses unless he moved 100% to cash and then he would make virtually nothing.

If it sounds complicated, it is. Which is why hedge funds have not been historically available to unsophisticated, non high-net-worth, retail investors, even though institutional investors like pension funds and insurance companies use them as part of their portfolio. And it is not something that is cheap, because you are not just having a computer buy and hold something in an index, it is driven by indivduals (or more complex bits of computer software than the ones used for trackers) making the decisions and so the management fee is high, and performance fees common.

A fund-of-hedge-funds is a fund which invests in a number of these funds, and will charge a fee for doing so, with the benefit to the investor being diversification (essential in the world of alternative investments) and taking the portfolio construction decision off your hands. But some would refer to it as fund-of-fees, because you are paying your management fees and performance fees twice - to your FOF manager, and still taking the fee exposure on the underlying funds.

So, there is no such thing as a low cost hedge fund, nor a low cost hedge fund-of-funds.

There are however, these days - if you're willing to pay an active manager to manage your pot with his convictions to try to generate an absolute return with lower volatility than regular equities and a higher return than cash or bond - a number of funds available to the UK retail investor which follow absolute return strategies. Basically these are quite complex, multi-asset funds.

The largest of these is Standard Life Global Absolute Return Strategies (GARS) which had over 17bn of assets at the April factsheet. It has a track record of decent low volatility net returns (international equity-like returns with much less volatility than MSCI world index) and I started using it when it was the only thing like it available in the Scottish Widows pension we have with work. But it is by no means the only such fund and past performance does not mean diddly squat.

The problem with hedge-type funds is that they are not very transparent and you do not really know what they are doing with your money from month to month, other than something magical to avoid losing money in bear years while still making money (at a dampened rate) in the bull good years. To most investors it is something of a black box, you put your money in and hope more comes out. You may remember such criticisms being levelled at Madoff or Charlse Ponzi. Consequently it is unsuitable for most. As an example of what it held in April to acheive its goal, factsheet extract below:



Clearly this is not for the faint hearted and is nothing at all like buying an equities tracker, bonds tracker, commodities tracker or real estate tracker.

jonesMUFCforever

Is this investing or gambling??

At the end of the day is there any difference?

redbuzzard

I increased my holding of GARS a couple of months ago out of nervousness after the preceding gains across the markets, even though I try to resist any temptation to time markets.

It hasn't pulled up any trees since since, in fact after edging up it has dropped just over 3% in the last month. That is slightly better than Ruffer Total Return,but very slightly worse than IP Income! My FTSE AS tracker which I sold down has dropped 6% in the same period.

The nervousness around this fund is, as Bowlhead says, that it is far from transparent - you really are handing all decisions to the managers without visibility. And while the track record overall has been good, since launch c. 5 years ago, that really is no guide to future performance.

Three of the original key managers have also left, (though there is a large team on this fund) and the size, at £17bn. or so, has made some investment consultants nervous - that question was being asked of SLI over a year ago, when they said that it was not a concern - not sure if there has been any comment since, though I think the growth has moderated.

GARS cannot be low cost, and is the polar opposite of passive. Apart from the team of fund managers there is the cost of operating derivatives.

bowlhead99

jonesMUFCforever wrote: »

Is this investing or gambling??

At the end of the day is there any difference?

I would say yes there is a difference. If you go to a casino you can make money or lose money but over time you expect to lose. If you invest in equities and bonds you can make money or lose money but effectively you are playing the role of casino owner rather than tourist and over a long enough time you expect to win.

However, despite this, pension funds and other institutions employ large and expensive dedicated teams of professionals to analyse, advise and manage their holdings to ensure they make the returns they need, and also minimise the drops. It is all very well saying you performed relatively well against the market index (if you are down 19% and the index is down 20%, you have a relative return of 1%). But, "you can't eat relative returns" and so SL GARS is aiming to deliver a positive return regardless of market conditions.

They converted the £1bn Standard Life Pension Fund to an absolute return strategy in 2005 and developed GARS "as a core proposition that would provide absolute returns with lower risk and acceptable fees". So they use both directional and relative-value strategies, with "Strategy selection based on return, diversification and liquidity ; Portfolio constructed for resilience and to maximise the range of scenarios that will provide a positive return".

Now, to some outside the world of investment management the strategies employed are gobbledegook and taking a punt on a manager who employs them is a gamble. But in the same way, owning shares in BP, Vodafone, Diageo is a gamble. If you don't know how to run an oil or telecoms or drinks business arguably you should not be allowed to own it and vote on kicking the directors out.

However, precisely because we don't know how to run such businesses - it would be a gamble to run them ourselves - we don't direct them ourselves, we invest but allow the board to run them.

If we don't know how to select the companies - it would be a gamble to do that ourselves - we invest but employ a fund manager to select them within a sector or geography or asset class, or take a punt that a tracker will deliver the average or above-average result

If we don't know how to select a sector or geography or asset class - it would be a gamble to do that ourselves - we employ an IFA or fund-of-fund manager to select other fund managers to deliver the result. Or we put our faith in one or two multi-asset portfolio funds and rely on the staff of analysts and managers being sufficiently smart and adequately motivated to deliver the return, while we sleep in the background and tell them to wake us up when it's over.

So there is a step by step process through which the gamble of running a business for profits, turns into the owning of a portfolio of economic interests in various financial instruments for profits.

To some, this is all gambling which has negative connotations and the long term outcome of bankruptcy. To others, it is accepted that investing has a positive long term outcome even if you don't know the ins and outs of it, and avoiding investment entirely or putting your eggs in one type of investment basket is a gamble which relies on you earning a lot more money throughout your life from your job (whether by earning a salary or a defined benefit guaranteed pension) to cover the risk of being caught short as you get old.

I would summarise by saying that taking a calculated risk which you believe to have a positive outcome is only gambling if you have miscalculated the risk, or don't have sufficient investment capacity to absorb the loss which you have calculated may happen. If you have calculated the risk as being broadly the same as a coin toss, rather than a positive outcome, then yes it is gambling. If you have not calculated the risk or given any consideration to the range of outcomes, then yes it is gambling.

To some, for those reasons, GARS would be gambling while a FTSE tracker or an individual share in their employer would not be. To others, a FTSE tracker or an individual share would be a bigger gamble as it is eggs-in-one-basket rather than multi-asset and has a greater track record of volatility. But you could validly have all three of them in a portfolio as they each have their strengths and weaknesses.

redbuzzard

jonesMUFCforever wrote: »

Is this investing or gambling??

At the end of the day is there any difference?

It may be neither, with elements of both.

When you gamble, you know what outcome will reward you - the horse winning, or the ball stopping on red.

When you invest, you can try to arrive at some basis of predicting future cash flows and put a value on that to compare with the price being asked.

With GARS you are giving somebody else the money to invest, and to gamble with. What is a hedge if not a gamble? GARS at one point had a big bet on Euro collapse (might still have) - maybe that was there to balance the effect of a euro devaluation on European equity holdings, which would be a true hedge, otherwise it was just a bet.

All you can say is that is has done mostly what it has set out to do, more for a reasonable period; it is not, we can be reasonably sure, a Ponzi scheme; and SL has put its own employees pension fund into it. Arguably it is close to a pension fund in a box - it can hold pretty well anything, and there is a large team of managers making their own choices, reviewed by a strategy committee which looks at the proposals and overall picture to maintain diversity and an acceptable risk profile.

Despite the absolute return and low volatility objectives, SLI still say it is not recommended for a < 3 year horizon.

It's nearly 20% of my SIPP, which is not a recommendation or advice of any kind.

Ark_Welder

robatwork wrote: »

Hi,

Most of the way through Tim Hale's "classic" and it's obviously published a while ago as he mentions Lehman Brother in one of the possible investments!

Nevertheless I am finding it a fascinating read. He also mentions a couple of the "damping" possibilities are in hedge of hedge funds, and commodities. And the fact that the only low cost funds at the time he wrote were in the USA.

Is that still the case or are there some nice low cost funds available here now that anyone would care to point me to so I can research further?

many thanks

There are a couple of ETFs available on the LSE that follow hedge fund indices, although the JP Morgan product might be priced out of range of many investors, being around ten-and-a-half thousand quid per share. And you might not find it so easy to get information on them all. But these things are invevitably going to be synthetic products due to the illiquid nature of the type of asset being tracked, which don't lend themselves to intra-day trading.

It is also debatable whether ETFs that track these are truly low cost: if the index being tracked represents the net returns of a number of hedge funds, then the return to the ETF holder is after the hedge funds have deducted their charges. Whilst not a direct charge to the holder, the effect on their return is the same.

There are a number of hedge funds and fund-of-funds to which retail investors have access via investment companies listed on the LSE. Those providing access to a single fund are called 'feeder funds' and invest their assets into a unitised fund that would otherwise have restricted access, e.g. minimum investment level and frequency of trading. But these listed companies have the potential discount/premium issues that tend to put off some investors. Those wary of charges might also feel their heart miss a few beats... (and if charges are of interest but not necessarily a concern then the best place to check them out will be in the reports of the underlying master hedge fund if they're not shown in the ITs reports).

However, whether or not these are suitable, or even necessary, for many individuals is probably a whole discussion of its own!

stardust09

robatwork wrote: »

Hi,

Most of the way through Tim Hale's "classic" and it's obviously published a while ago as he mentions Lehman Brother in one of the possible investments!

There is a new edition of Tim Hale's book coming out in October, for those of you who are interested.

kidmugsy

OP, take a shufti at the annual and quarterly reports of Personal Assets Trust - it might be trying to do what you want.

http://www.patplc.co.uk