In the population at large the perception of hedge funds – if articles in the general press are anything to go by – is that they are risky i...

In the population at large the perception of hedge funds – if articles in the general press are anything to go by – is that they are risky investments. They often produce stellar returns, but you may loose all your investment, when the manager gets the market wrong or through fraud or mismanagement. For those in the know, this has always been a gross simplification at best, and at worst a massive distortion of the truth. Single manager hedge funds (not fund of hedge funds) are exceptionally useful tools for today’s portfolio manager. With them risk can either be managed - as their name implies, or absolute returns can be relentlessly pursued. This point is well demonstrated by the investment philosophy of Ansbacher’s chief investment officer, Mike Hollings. Ansbacher’s approach has historically been biased towards wealth preservation and Mr Hollings uses hedge funds extensively to this end. In fact, the lower the risk profile the higher the proportion of hedge funds in a typical Ansbacher portfolio. “We give clients a totally bespoke service in building a portfolio. But in low risk portfolios we would typically recommend that 80 per cent should go into hedge funds, whilst in a growth fund we would only recommend around 50 per cent,” Mr Hollings told WealthBriefing. A glance at Ansbacher’s model portfolio record reveals steady performance across all risk profiles with limited monthly drawdowns, confirming that strategic use of hedge funds does not imply a rollercoaster ride. Hedge funds tend to have much lower levels of volatility compared with even blue chip equities and the research and due diligence that precedes every hedge fund investment usually far outweighs the investment approval process for household name equities. “You only have to think of Marconi, Polly Peck, WorldCom and, most recently, Enron to realise that the real risk, but also the biggest potential returns, is in investing in big name equities. In the hedge fund world we’ve only really seen one major blow-out, LTCM, and even that was bailed out, and some smaller ones such Cromwell Fund run by Bailey Coates which closed last year having lost about 20 per cent of client money,” he said. “The important thing is not what you make, but what you’ve risked to achieve it,” he added.