ESTIMATES PUT the size of the global hedge fund industry at around $US500 billion – pretty big for an industry most New Zealanders have little contact with.

High net worth individuals – those with private accounts at the world’s most exclusive banks and asset managers – have invested in hedge funds for years, but theirs is an elite club, with investment portfolios running into seven-figure sums.

Now, there is a creeping global democratisation of hedge funds, with punters across the US, Europe, Asia and Australia taking a slice of the action.

Whereas 15 years ago an investor would have needed $250,000 or more to buy into hedge fund products, many run from locations such as Wall St and London, today $5000 is enough to get in on the game – in line with more mainstream sharemarket funds available from groups like Tower, Sovereign and the banks.

Indeed, such is the interest across the Tasman, a survey of 200 financial advisers found 22% believed at least 10% of clients’ investment portfolios should be in hedge funds. Of the advisers surveyed, 69% had allocated client assets to hedge fund products in the past 12 months, 95% expected to in the coming year.

Fundsource, the Kiwi investment fund research house, is recommending 10% of a balanced investment portfolio should be in absolute return-style investments – including hedge funds, funds of hedge funds (where the manager buys a basket of hedge funds), and structured products, a relatively new form of sharemarket investment with protection against losses.

That level is not matched by the asset allocations of many financial advisers, though some, like Peter Hensley of the Money People, allocate between 5% and 25% of a client’s investment portfolio to alternative investments. Money Managers, for example, allocates 41% of its Prudent portfolio to equities. Of that 41%, 13% is in absolute return-style investments. It is an area where the transparency of products is often low, making going it alone difficult.

Even the terminology is confusing. Money Managers’ managing director Doug Somers-Edgar said the term “absolute return” carried the connotation of a win-win investment.

History had proved this to be untrue, he said. In theory they had an important place in portfolios. A well-run hedge fund should be able to make money in rising and falling markets.

“Hedge funds are a new sector in New Zealand, and a new sector around the world, and it is bound to become more important here because hedge funds have low correlation with equity markets,” said Fundsource’s Tim Anderson.

That means should equity markets head downwards, there will be a balancing effect produced by well-run hedge fund investments, reducing volatility in investment portfolios and thus the painful short or medium-term losses.

In New Zealand there are a number of products available. However, because of our size and the expense of coming here, there is unlikely to be a glut of options, according to John Morrison, managing director of OM Strategic, a Sydney-based firm whose first $NZ-denominated capital protected fund of hedge funds, the OMIP 140, closes to new business on July 11.

At that point it joins Macquarie’s Titan products, being closed to new investors, meaning they can be bought only in an informal “grey” market making them hard to access and exit.

The OMIP 140 locks investors in for 12 years. It promises a minimum 40% return, with returns targeted at 15% a year.

Hedge fund products with capital protection are seen by many as belt and braces.

It sounds good but, asked Somers-Edgar, when did global equity markets ever have a negative 12-year performance? But, Hensley argued: “The capital protection element removes some risk from the client and makes it easier for groups to market.”

Despite the difficulty for overseas operators to bring hedge fund products to New Zealand, Morrison said: “The real key for the New Zealand market is performance. Over the last three years global hedge funds have averaged 2%-3% returns per annum. While that’s great compared to the German or UK stock markets, the New Zealand benchmark is much higher.”

A far higher return could be generated through fixed interest investments, he said. To compete, hedge fund products must offer returns of 10%-12%. It’s a tall order and it may be that the real niche for hedge funds in New Zealand is in pension funds where small holdings can offset losses from global equities.

As well as popular capital protected hedge fund products, New Zealanders can buy hedge funds directly from overseas groups such as Platinum, Absolute Capital and PM Capital, all based in Australia. While Platinum and PM Capital buy shares directly using long/short strategies, Absolute Capital manages funds of hedge funds – a fund investing in a basket of other funds.

The oldest freely available fund of this type is the GAM Global Gateway fund. Set up in 1991, it is run by GAM, the world’s largest fund of hedge fund manager – and arguably one of the most successful. While the 1991 fund has stuttered, the Multi-Trading fund, founded in 1994, has shown strong performance. According to Fundsource, it has managed annualised returns of 12.89% in the seven years to May 31, 2003, though the annualised rate has dropped slightly since then.

Last week, two of GAM’s fund managers, charged with finding good investments, were in New Zealand. They are part of the team that manages GAM’s $US12 billion assets under management. They estimate there are 90,000 hedge funds worldwide.

Based in Hong Kong, David Lam and Josephine Shaw said that two years ago New Zealand had a higher uptake of hedge fund investment than Asia, but had since slipped back.

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