Tim Wood in New York
Hedge funds run the world. They command mighty balance sheets that can ruin a currency in hours or shape investment fashions for months. They also unwind spectacularly when things go wrong, but generally they are an investor’s dream with a safety net for the down times.
The problem is that gaining private access to a hedge fund generally means counting a boat in the Monaco yacht basin among your assets. Just two years ago you needed at least $1-million, which was ideally all available to be invested in the fund. Now about $250 000 will get you into the club; an elite global one at that.
That’s the new minimum level set by United States investment house Frank Russell, a $70-billion undermanagement subsidiary of life giant Northwestern Mutual, which launched its first hedge fund for non-US investors. South Africans will have access to the fund through Investment Solutions and Liberty.
The Alternative Strategies Fund is a multi-manager product that invests in 14 underlying hedge-fund managers. The fund’s brief is “non-directional”, which means that it can do pretty much whatever it likes. “Directional” funds focus on playing equities long and short, while the more diverse funds also arbitrage all securities, currencies and commodities.
Hedge funds have had bad press in recent years with Long Term Capital Management going bust after being caught short in the 1999 gold spike. The firm had aggressively shorted gold with highly leveraged derivatives and ended up being rescued by the Federal Reserve and a consortium of New York banks. George Soros, the scourge of the pound in 1992, also suffered a humiliating setback when his hedge funds nearly collapsed in the wake of the 1997-1998 Asian financial crises.
However, the special vehicles are favoured by the wealthy because they protect investments from plunging markets. They also consistently outperform regular investment vehicles that tend to do no better than track or trail the major indices.
The fund is capped at $2-billion, which means it can take about 9500 investors if all of them put in the minimum balance. But Frank Russell is confident they’ll hit that ceiling quickly, so they’ve lined up another 16 fund managers for any potential overflow.
Frank Russell reports that its European operations are growing especially fast as the rest of the world catches on to something the Americans have been at home with for years. For South Africans with blocked rand assets, the fund should provide good diversification at low risk although the fees could be steep.