Martin Spring
london calling
It jumped out of the tables of investment performance I was reviewing as I flew to Hong Kong on Sunday a fund that has not only delivered a return of 439% over the past three years with below-average risk for its sector, but that has even managed to increase in value almost 14% over the past quarter, a period when the MSCI index for Far East equities fell 9%.
Why had I never before heard of a fund called JF Asia Absolute Return, especially as it’s in the stable of the giant investment conglomerate JPMorgan Fleming, with $530-billion under management worldwide?
The reason, I learned, is that JF is not permitted by the Hong Kong regulatory authorities to promote the fund in the retail market that’s to ordinary investors like you and me. It is only distributed through brokers, who presumably like to preserve this gem for their special clients.
The explanation for this marketing restraint is that JF Asia Absolute Return is a hedge fund and hedge funds are generally prevented in countries with sophisticated investment regulation from promoting themselves.
The financial bureaucrats say hedge funds are too complicated for the general public to understand, too lacking in transparency about what they’re up to and too difficult to exit from in a hurry compared with your plain-vanilla “long only” unit and investment trusts, that is.
But in an environment of turbulent, gut-wrenching, down-trending stock markets what this amounts to is that the kinds of funds that are almost all losing money are OK for ordinary folk to invest in, but not the kinds with a good chance of delivering profits.
That’s what hedge funds can do. Not only because they’re managed by some of the brightest managers in the investment business, but also because they usually have the freedom to do a wide range of things to make money go short (profit from falling share prices), buy or sell derivatives, flee into cash, borrow to gear up returns, and invest in special situations such as mergers and acquisitions and distressed debt.
Those words in the JF fund’s name, “absolute return”, tell you something important.
Most investment managers, whether they’re working for the big fish (pension funds) or the minnows (you and me), are happy to do no more than outperform their benchmark index. In a bear market, that means if the index falls 20% and the fund they manage falls only 15% they think that’s cause for congratulation.
Investors find this unconvincing. That is why so many of them are now turning to hedge funds that aim to deliver an absolute return to give you a reasonable profit whether the markets go up or down.
The JF fund, for example, says its objective is: “To provide investors with long-term capital growth in [United States] dollar terms through an aggressively managed portfolio of equities, bonds and currencies, and derivatives of any of these, and to achieve a positive gain regardless of market conditions.”
It seeks to achieve this by primarily investing in the Asia-Pacific region.
At the end of January the latest date for which information has been disclosed the fund had 73% of its holdings in cash. Its biggest investments were a currency option betting that the Japanese yen would weaken in dollar terms (it did), Singapore electronic components manufacturer Wong’s Circuits, Japanese machinery maker Disco, two Hong Kong banks and an Australian insurance company.
That gives you the flavour of the fund, although obviously content will be fast changing. In one month alone, January, more than 10% of the fund was shifted out of cash and into securities.
The fund is managed by the group’s most senior investment officer in Hong Kong, Roger Ellis, and is still quite tiny, with assets of less than $30-million at the time of the last published report.
That is one reason for its success. With a tiny fund you can get into or out of any investment fast without fear of driving the price up or down against yourself. And you can invest in stocks with small market capitalisations that just aren’t practicable for larger funds.
In Asia, as in America and Europe, investors are increasingly keen to have a stake in hedge funds, and that is putting regulators under pressure to ease restrictions on their marketing.
JF Funds’ head of strategic planning Sandra Lee told me that in Hong Kong, at least, the regulators are “warming up to the idea” that ordinary folk should no longer be penalised through failing to be told about these interesting alternative investments.