Private investors are beginning to look enviously at the juicy returns being made by the rich men’s funds, run by independent managers for themselves and their friends.

Typified by former Baillie Gifford manager Max Ward, who set up the Independent Investment Trust in Edinburgh two years ago, the liberated managers are focused not on benchmarks but on making real money for the wealthy investors, including themselves, who have bought their shares.

As ordinary investors scour the market for unit or investment trusts which ought to beat cash, but might not lose them huge amounts in a falling market, the clever money is pouring into funds which are still well-kept secrets. But is it too late to join the party?

Last week, a 40-page report by the former Labour MP and regulator Oonagh McDonald, commissioned by industry players, recommended that private investors be given greater freedom to invest in hedge fund- type investments.

Like hedge funds, the rich men’s funds aim to make absolute returns, not simply to beat a benchmark index which may have fallen by 30%.

But, unlike hedge funds which are barred to ordinary investors, shares in these obscure but growing trusts can be picked up in the market.

The Independent trust, launched with (pounds) 52m from invitation- only buyers at 100p a share in October 2000, was sitting at 160p last week.

It is listed as one of 35 “global growth” trusts, which are measured against the S&P Global index. But, unlike the official weightings of the index, which might allocate 50% to the US, 15% to the UK, 10% to Japan and so on, Independent has huge bets on UK housebuilders and retailers, and ignores the index altogether.

The global index is down by 23% over the past two years, while Independent is up 38%. Last year, when the index fell by 28%, Independent rose by 9%. To the end of July 2003, the world index rose by 6.6%, the trust by 26.2%.

The (pounds) 114m Personal Assets Trust, 30% owned by its manager Ian Rushbrook, also in Edinburgh, was 65% cash earlier this year until Rushbrook decided it was time to start buying again. It is one of only eight trusts out of the 35 in the sector to have made any money for its shareholders over five years, and it is the second top performer over 10 years. Along with Rushbrook’s (pounds) 9m Collective Assets trust, Personal Assets was one of only a handful of global trusts to make money in 2001.

Managers of conventional funds are considered successful if they simply beat the index, as Independent’s admiring rivals explain.

“In the eighties and nineties, private clients were offered growth, income, or balanced. You had a benchmark, and if you were 1% ahead of it or even 1% behind, it the client was reasonably happy,” says David Brazier, a director of CG Asset Management which runs Capital Gearing, a (pounds) 35m trust in the UK Growth sector. “But everything went horribly wrong in the year 2000, and people are looking for alternatives.”

Over three years, the all-share index has fallen by 27% and the FTSE-100 by 28%. Capital Gearing, managed by Peter Spiller, is 59% ahead.

Brazier says: “Peter hates losing money. He has produced 20 years of positive returns for CGT and he thinks that is what he should be doing. The trust doesn’t need a health warning because it is good news.”

Such good news that CG decided to try to raise (pounds) 60m for a new open-ended fund – and has decided to call a halt after raising (pounds) 100m.

Brazier says: “We don’t believe in benchmarks for the private individual – cash is the best benchmark.”

Hansa Trust, another independently-run UK Growth trust, is about to abandon its all-share index benchmark. Company secretary David Gardner says: “Although many people look to the index to see how the investment manager is doing, it was felt that the benchmark he should be looking at is the real rate of return . . . When markets are roaring up, everybody wants to jump on the all-share, but not when it’s falling.”

Hansa did not escape the tech meltdown,but it has trebled investors’ money over 10 years, more than half as much again as the all-share, and beaten only by – Capital Gearing.

Another breakaway manager Nick Train, formerly a star at Finsbury Close, has set up Lindsell Train as a trust which has a significant stake in his own management company, while the managers own 10% of the trust. Its benchmark is to beat the long-term cost of capital.

Train says: “Our fundamental principle is to create maximum commonality of interest between ourselves and our investors, who are private individuals.”

But Train admits: “The sad fact is that not every professional investor is a Max Ward.” And the sad fact is also that the (pounds) 19m trust, which is heavily invested in long-dated government bonds, is 25% down since launch two years ago.

Bets can go wrong. Andrew Dalrymple, who runs the First State Global Opportunities Fund unit trust as a “no benchmark fund”, recorded an 85% return in 2000 but lost 30% the next year, and admits: “From time to time, you take big bets which don’t go as right as you think they will.”

He currently has up to half the fund invested in Asia, against a 2% weighting for the world index, and is performing strongly.

Independent’s board has taken a policy decision not to talk in any way about the trust, supposedly for fear of attracting “the wrong sort of investor” who does not understand the risks.

The biggest deterrent, however, for late arrivals at the party is not the risk but the cost of entry. Independent’s shares were trading last week at a massive 13% premium to the value of the trust’ s underlying assets, where the average trust trades at a hefty discount. Capital Gearing and Personal Assets are also at a premium.

Add that to the cost of buying in and out of an investment trust, and it means that new investors will have to trust that the funds _ and their maverick managers _ will continue in rude health.