Movies may be glamorous but the industry has seen its share of big-budget blowouts, making investors wary even with the promise of tax breaks. However, a new fund has been launched that its manager says adopts a conservative investment approach.

The new fund is listed in the Cayman Islands, Grand Arcade Film Fund. It is a sister to the existing BVI-registered P&C Arcade Film Fund. The new portfolio has the objective of earning an annual return of 12 per cent in sterling after all fees and costs and operating in a “conservatively managed risk environment”, a press release from the fund’s manager said.

"We are replacing the banks who have all withdrawn from this market due to their lack of liquidity, by offering secure lending in first position to the global media and entertainment industry. We are delighted that the year one performance of our [BVI] fund has netted investors an 11.24 per cent return after costs,” said investment manager Christopher McGinty. The BVI-registered fund was launched in April 2008.

Hedge funds and long-only portfolios have been branching out into sectors such as movie-making. Another firm in this sector is a hedge fund business called Aramid Capital Partners. It has been involved in films such as W, Bronson, and Chéri, according to its website.

According to the Arcade Film Fund’s Mr McGinty, film producers are so keen to get films made that they have become used to paying interest of 5 per cent above the Libor rate for secured loans and arrangement fees of 5 to 10 per cent of the amount loaned. For short-term bridging loans, monthly interest rates of 2 to 3 per cent are not uncommon, he said.

“Our investment objective is to secure a high level of accumulated interest income from investing in specially structured short-term loans made to film, TV and entertainment production companies and re-investing the investment proceeds on a continuous basis in a portfolio of new productions,” he said.

McGinty's fund provides short-term asset-backed liquidity to TV and film producers via short-term loans. These are not equity investments, nor are the returns dependent on film box office performance. In essence, the fund is involved in the "manufacturing" of film, not the sale and distribution to end consumers.

Institutional and retail share classes are available in Grand Arcade Film Fund Ltd, which is suitable for direct investors as well as vehicles such as self invested personal pensions.

Mr McGinty is currently Investment Director of Kreis Consulting, a Scottish investment management and fund distribution company which is authorised and regulated by the Financial Services Authority in the UK and which has sister companies in Zurich, Switzerland and Munich.