Hedge Funds

The name “Hedge Fund” was never meant to be racy – these funds aim to return a positive absolute return year on year by hedging away the risks. They aim to beat the return on cash by a similar amount to equities, but with more steady growth. In this sense, they strongly mirror the objective of a with profits fund.

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The name “Hedge Fund” was never meant to be racy – these funds aim to return a positive absolute return year on year by hedging away the risks. They aim to beat the return on cash by a similar amount to equities, but with more steady growth. In this sense, they strongly mirror the objective of a with profits fund.

The core investments for most with profits funds are government bonds and UK equities – and ours is no different. Other investment classes tend to have drawbacks that limit the proportion of our fund we would want to commit to them – but they provide welcome diversification – vital for spreading risks and smoothing returns. If we had too much in equities, then the pay-outs to our members would fluctuate from year to year by more than we would like.

However, last year, the usual alternatives to UK equities did not appeal. Overseas equities were not the answer - markets around the world tend to follow each other, with the US leading the way. Commercial property looked overpriced. Corporate bonds were paying a very small premium compared to similar bonds guaranteed by the UK government - this was before the market had woken up to credit risk.

So we started to look seriously at hedge funds - or rather funds of hedge funds. Again it is all about spreading risks, so

• we will only put a small part of the fund in this sector (currently we have less than 5%, but we could go up to 10%)
• we will only use funds of funds
• we will spread our investment between different funds
• we will avoid funds that go tend to up and down with the equity market