Facing this difficult market environment, many were tempted to look at absolute return and hedge funds. Most retail investors opted for open-ended funds in the UT Absolute Return sector, which contains 63 funds, managing £23.6bn of assets. The investment trust universe, however, should not be overlooked. The IT Hedge Funds sector contains several trusts with impressive performance and access to some of the highest-profile managers in the industry.
As a whole, open-ended absolute return funds have performed better than their closed-ended counterparts in the long-term. While the average vehicle in the IT Hedge Funds sector protected capital last year marginally better, with returns of 1.44 per cent, a number of poorly performing trusts bring the sector down over five- and 10-year periods.
This was most notably the case in 2008 when the sector lost 37.53 per cent, compared with gains of 1.10 per cent from the average Absolute Return fund. The worst performer over the 12-month period – Third Point Offshore Investors – was down 64.56 per cent.
This poor performance can be partly explained by the discount effect that impacted the investment trust universe in 2008. Hedge funds often invest in illiquid instruments or do not disclose their net asset value (NAV), which can have a negative effect on discounts.
However, there are some strong performers within IT Hedge Funds that are largely ignored by the retail market. Three trusts stand out, as not only the most popular and largest funds in the sector but also its most consistent outperformers: BlueCrest Allblue, Brevan Howard Macro and Brevan Howard Global.
These are all fettered funds of hedge funds, which allow smaller investors the chance to participate in Brevan Howard and BlueCrest’s success stories without having to buy them directly. In addition to providing broad exposure to the hedge fund industry and its uncorrelated performance, funds of hedge funds also diversify the risks associated with a single investment fund.
Risk/return of open- and closed-ended funds
Source: FE Analytics
These three trusts have consistently outperformed their peers and benchmark. In the three years to 1 January 2011, they have provided an average return of 20.7 per cent, compared with 14.88 per cent from the average UT Absolute Return portfolio. The average return of the four largest Absolute Return vehicles, which account for 75 per cent of total assets in the sector, was 6.3 per cent.
The BlueCrest Allblue portfolio is the only one of the three with a five-year track record. According to FE data, it returned 97.24 per cent in the five years to 1 January 2012, outperforming the average Absolute Return fund by 82.31 per cent.
It is also the cheapest of the three, with a total expense ratio (TER) of 0.16 per cent.
These three trusts are, of course, significantly more volatile than the typical Absolute Return fund, and investors will have to put up with shifts in the discount.
The FE Risk Score confirms that the BlueCrest and Brevan Howard managers have adopted a riskier approach. FE Risk Scores define risk as a measure of volatility relative to the FTSE 100 index. According to that measure, the BH Macro fund is the riskiest of the three, but remains less volatile than the FTSE 100.
The strong performance of these three trusts has already been tapped into by open-ended funds; according to FE data, 16 funds include BlueCrest Allblue in their top-10 holdings, including the £929m BlackRock Cautious Portfolio.
Two funds – Newton Phoenix and Newton Phoenix MultiAssset– hold all three in their top-10.