Does your pension fund use private equity & hedge funds?

cepheus

I've never understood why volatility rather than draw-downs are used for risk assessment. Who is worried about how much their investment increases above the trend?

I'm not pushing GEBs BTW, just pointing out the criticisms of these may well apply to absolute return funds.

Ah now doesn't this sound familiar?

Absolute return funds

have come under fire for high charges - including in some cases easily achievable 'performance fees' - and complexity as well as poor performance.

but others on this thread claim we should turn a blind eye to charges and their performance is OK!

cepheus

Oh dear, read this more confirmation, although it's a bit hypocritical to hear Hargreaves Lansdown moaning about fees!

According to detailed research published by a firm of financial advisers last week, only three absolute return funds are worth considering. This represents just 6pc of the sector of 51 funds.

Informed Choice looked at a range of factors, including performance, consistency and charges, awarding funds a total score out of 100. It decided that only funds that scored more than 80 should be considered by investors, and the three funds that managed this were Henderson Credit Alpha (with a score of 92), Insight Absolute Insight (81) and Newton Real Return (80).

Two-thirds of the funds received a score of less than half the maximum possible.
Martin Bamford, of Informed Choice, said: "Absolute return funds are regularly criticised for their poor performance and high costs. This research demonstrates that criticism is justified for the vast majority of funds in the sector.

"Our fund selection process seeks to identify funds that demonstrate consistent risk-managed returns, combined with low total expense ratios. Absolute return funds have never been a comfortable fit with our investment philosophy and this research shows that they offer very little that should attract investors."

Mark Dampier of Hargreaves Lansdown agreed. "These funds have been a grave disappointment," he said. "They haven't lived up to their name."

He particularly dislikes the fact that many absolute return funds impose performance fees – and that these charges can be triggered even when performance has been lacklustre

Ark_Welder

cepheus wrote: »

...but others on this thread claim we should turn a blind eye to charges and their performance is OK!

Which is exactly what you have done with your purchase of a GEB.

cepheus

That GEB was a pre-defined institutional product (presumably without the high charges) which provided a 16% per annum return over 5 years as it turned out, however there was an element of luck even in that case. I understand most GEBs are very poor value. Read the specific GEB thread

Many of those products use hedging and can't possibly provide good value if the managers take a big cut, since the options market is a zero sum game. In view of the very poor performance of discretionary managers, any product which takes a big cut must load the dice against the purchaser.

bowlhead99

cepheus wrote: »

That GEB was a pre-defined institutional product (presumably without the high charges) which provided a 16% per annum return over 5 years as it turned out, however there was an element of luck even in that case.

When you say 'presumably without the high charges', it depends what you mean by a charge. GEBs are typically giving up dividend income and part of the available capital gain to buy insurance against it going down. If your money is being spent buying insurance that turns out not to be needed, that is a cost, but it may not be minded by you the investor because you like the idea of having insurance and if it's not needed you are getting a nice positive return anyway so you don't mind. Of course, it might not be seen by you as a charge, which is fair enough, the insurance policy is simply another type of asset bought by the fund that can produce a return.

The other charges wrapped into the product which represent income to the provider of the product are not always explicit, but they are not doing it out of the goodness of their hearts. For example, if they say they will give you 95% of the rise in the FTSE index, they are taking 5% of all your capital profits and the 3% dividends every year, and splitting that between an annual income to the provider and some downside protection insurance. As you mentioned, a lot of GEBs are poor value (depending on market conditions) although you might have been lucky to find yours, and of course being in the right product at the right place at the right time, can be very lucrative.

Alternatively they might say they will deliver you a 10% return as long as the FTSE is a higher absolute number than it was at the start. That 'charge' is somewhat opaque because it could be 30% in a good FTSE year but it might also be negative if they've promised you the return and their insurances and divi income only goes part way to getting your 10%.

If you look at a bank account, I can put 85k into one of those and get a complete guarantee of no downside, and maybe make 1.75% in interest over the year. The bank will have taken my 85k, lent some of it on mortgages at 4% and some of it on loans at 9% and some of it on credit cards at 25%, and then used all of the income from those activities to pay internal costs of running its business and giving shareholders some profit, and amongst other things perhaps putting some cash into the FSCS scheme to help the banking industry pay compensation if one of them can't afford to give investors their 85ks back. After all those costs and charges, my net return is 1.75% even though the bank first obtained a much greater amount and then paid itself some costs.

So, a bank account might have massive charges on a percentage basis, once you get through the opacity of the structure - the 'pre-defined' return.

Many of those products use hedging and can't possibly provide good value if the managers take a big cut, since the options market is a zero sum game. In view of the very poor performance of discretionary managers, any product which takes a big cut must load the dice against the purchaser.

I think most fans of passive investing would say that everything is a zero sum game (in terms of individual funds deviating from the average result) and so any fees are to be avoided. That logic can of course be applied to active managers who use options and hedges. It is the same argument, the only difference is the expected return from all equities in a year is say -50% to +50% (with a long term positive trend) while the expected return from all options is zero with a long term zero trend.

Of course, there can be skill in selecting the strategies for investing in equities or bonds or hedges, and getting it right can deliver good returns for the risk, more than sufficient to pay the fees. The ones whose returns are not good enough to cover the fees and leave enough for the investor, will be exposed by their net returns being worse than those of competing funds. The ones performing well in difficult asset classes may well charge performance fees, where you pay for them to do a good job, and don't pay them if they dont, and don't pay them if they are merely recovering back up to the level at which you had previously paid them.

Ultimately if you, as an investor, look at net returns from your investing endeavours against your perception of the risks involved - you can decide whether to continue with those endeavours. For me, it is more about how those net returns stack up against my needs and expectations, than it is about what gross return I could have achieved if I had somehow been able to do all the research and stock selection and trading and management of efficient hedging strategies with the same economies of scale as an institutional fund manager, without paying fees.

Sure, if I can get a bit of exposure to a market at a low charge, I might have some of my portfolio in a tracker costing 0.3% a year or so, win or lose. I have also on occasion achieved 50%+ net in six months from a fund that charged management fees and performance fees, and was not the least bit disappointed. And I've also achieved a couple of percent in a bank account while the bank earned £billions in profits. All of those products were suitable for my objectives, despite the fee structures being very different.

cepheus

bowlhead99 wrote: »

When you say 'presumably without the high charges', it depends what you mean by a charge. GEBs are typically giving up dividend income and part of the available capital gain to buy insurance against it going down. If your money is being spent buying insurance that turns out not to be needed, that is a cost, but it may not be minded by you the investor because you like the idea of having insurance and if it's not needed you are getting a nice positive return anyway so you don't mind. Of course, it might not be seen by you as a charge, which is fair enough, the insurance policy is simply another type of asset bought by the fund that can produce a return.

I'm defining charges here as payment excepting insurance. If a product is trading gain for safety that 'insurance' might be an acceptable trade as part of a portfolio. It's when the company is paying off a large proportion to pay the manager or intermediaries these are warning signs the product might not be good value for the investor. To justify this requires proof that performance is (statistically) related to pay something the financial industry has not been able to demonstrate.