Cade (pictured) says that the funds’ low correlation to other asset classes makes them particularly appealing in a market such as today’s.
The vehicles have been overlooked in recent years as investors hunt for yield in sectors such as infrastructure and debt, pushing them on to attractive valuations, he explained. "Unlike funds of hedge funds, the listed single-manager funds have delivered consistent positive returns with a low correlation to mainstream asset classes," Cade said.
"This universe includes 'best of breed' managers such as Brevan Howard, BlueCrest and CQS, and encompasses a range of strategies and risk/return profiles."
"Most of these funds have been effective at protecting capital during periods of market turmoil."
"In our view, this makes them attractive as portfolio diversifiers, given the rally in equity/bond markets."
The hedge fund sector has suffered since the financial crisis, with many funds failing to protect capital in the market shocks of 2007 and 2008.
Funds of hedge funds were the biggest losers in this period and were pushed on to particularly wide discounts.
Cade says that he now doubts the viability of these funds, which are only bought by value investors intent on urging the sale of assets to profit from the discounts.
However, single-manager hedge funds performed relatively well, and in some cases actually made money in NAV terms during 2008, as they were supposed to.
Cade recommends BlueCrest AllBlue for investors seeking a low-risk investment with little correlation to equities.
"We believe [it] is well placed to continue to deliver high single-digit NAV returns through a combination of discretionary and systematic trading strategies," Cade said.
"AllBlue is the most liquid listed hedge fund and its current discount of 4 per cent is protected through share buybacks."
BlueCrest AllBlue made NAV returns of 12 per cent in 2008, according to Numis’s figures, while the FTSE All Share lost 29.93 per cent.
In share price terms, the trust finished the year up 26.86 per cent, according to data from FE Analytics.
Although the share price has gone through some periods of underperformance, our data shows investors in the trust have beaten both equities and bonds – the latter measured by the iBoxx Sterling Overall All Maturities index of corporate and government debt.
Performance of trust vs indices over 5yrs
Source: FE Analytics
The trust has made 78.04 per cent in that time in share price terms, while NAV returns have been positive in each calendar year.
One of the drawbacks of listed hedge funds is the cost, however. The ongoing charges on BlueCrest AllBlue calculated by Numis are 2.07 per cent.
Cade also rates BH Macro, currently even more expensive, with charges of 2.54 per cent.
"BH Macro is a pure macro fund and we regard it as an attractive portfolio diversifier, given its record of delivering strong returns in periods of market dislocation and rising volatility," he said.
The trust is another to make positive NAV returns each year since 2008. It has made 84.55 per cent over the past five years, while the FTSE All Share has made 35.27 per cent and the broad bond index 45.34 per cent.
Performance of trust vs indices over 5yrs
Source: FE Analytics
However, returns are only one part of the picture. Hedge fund strategies are particularly attractive right now in such an uncertain market.
A threat of a double crash in equities and bonds, as happened in 1994, haunts markets, and investors are having trouble coming to a view on what is likely to happen to their investments in the near future.
One well-known manager who wished to remain unnamed told FE Trustnet today that he honestly has no idea whether the market was more likely to go up or down from where it is.
The low correlation of hedge fund strategies to both markets seems like a strong selling-point in such an environment.
Our data shows that both trusts have a very low correlation to the UK equity and bond markets; both have a low negative correlation to the All Share.
Correlation of trusts to indices over 3yrs
| Name | Bluecrest AllBlue |
Brevan Howard Offshore Mgmt BH Macro | FTSE All Share |
iBoxx Stg OVERALL ALL MATS. |
|---|---|---|---|---|
| Bluecrest Allblue | N/A | 0.46 | -0.31 | 0.03 |
| Brevan Howard Offshore Mgmt BH Macro |
0.46 | N/A | -0.40 | -0.06 |
| FTSE All Share | -0.31 | -0.40 | N/A | -0.37 |
| iBoxx Stg OVERALL ALL MATS. |
0.03 | -0.06 | -0.37 | N/A |
Source: FE Analytics
This, along with the strong performance in 2008, should be enough to raise some interest.
Cade also highlights CQS Diversified, which is particularly cheap on a discount of 6 per cent, and Third Point Offshore, run by star US manager Daniel Loeb.
"CQS Diversified offers exposure to a range of strategies, including ABS, credit long/short, convertibles, and macro," Cade said.
"Some of these have relatively high risk/return profiles, notably Michael Hintze’s Directional Opportunities fund, but this is dampened by the diversification of strategies, with an overall return target of 10 per cent plus p.a."
"Third Point Offshore has a higher-risk, higher-return profile (target return of 15 per cent p.a.) and we believe that there is potential for shareholder returns to be enhanced through a narrowing of the current 9 per cent discount."
"Third Point is an event-driven fund managed by Daniel Loeb, which has a good track record in strong markets, and has tightened risk controls since the financial crisis."
CQS Diversified has ongoing charges of 2.46 per cent and Third Point of 2.61 per cent, according to Numis’s calculations.
As well as consistent NAV returns and strong performance in market shocks such as those of 2008, Cade highlights the lower fees incurred on listed hedge funds than on funds of hedge funds, where the investor pays a double layer of fees.
The trusts also provide tax-efficient wrappers for UK tax payers, which enables gains to be treated as capital, Cade says.
