What's new in hedge funds?

Hedge funds are still a bewildering asset class to many investors, and it is true that the arithmetic of their investment models is often only understood by the 'rocket scientists' that put their investment trading strategies together.

Yet at a conceptual level what a hedge fund does is quite simple to understand. A hedge fund takes your money and trades in financial markets according to a defined strategy to maximize returns - something no average investor could do for themselves, unlike say investing in stocks or real estate.

Selection vital

Like any other financial investment picking the money manager that will handle your cash is critical. So too is selecting the type of strategy that the hedge fund will pursue - for in reality it is wrong to see hedge funds as a single asset class as they can be very different and do not perform as a block.

So while one hedge fund might be performing badly another type of hedge fund could be performing very well, unlike for example a downturn in the real estate sector which will hit the whole asset class. The trick is to pick the right manager and the right hedge fund strategy.

The biggest name in hedge funds in the Middle East is Man Investments, with some 10% of its $46 billion global assets under management in this region. AME Info asked managing director of global sales for Man Investments, Dr. Christoph Moeller which hedge fund strategies are finding favor now.

Top hedge fund picks

'First, global macro or managed future directional trading is gaining popularity. For the past two years volatility in financial markets has been very low and this is unusual. What directional trading does is to anticipate a return of volatility and take advantage of such movements. We have big imbalances in global finance, high oil prices and interest rate rises which ought to provoke a significant movement and cause the US dollar to decline.

'Secondly, we have strong interest from investors in funds with a commodity theme. Investing in a diversified hedge fund focused on commodities will deliver less volatile returns than pure commodities, and yet benefit from the same argument of rising demand from emerging economies. We have taken over $1 billion into this sort of product recently.

'Thirdly, Asia is a new theme and we have two small units now in Asia in Tokyo and Melbourne. The problem is that there are not so many hedge funds. But the under researching of small cap stocks does offer opportunities to benefit from market inefficiency and we focus mainly on long and short equity positions.'

Man Investments has a minimum investment of around $50,000 for private clients and is mainly focused on the private mass affluent market and upwards. The group spends considerable effort on forward looking research to be able to develop products in time to meet demand.

'We are examining Eastern Europe and Brazil, for example,' says Dr. Moeller. 'Brazil is too small at the moment. Of course, not every product we look at comes right.'

And Dr. Moeller admits that in the Gulf States, as in most markets, Man's biggest competitors are local stock markets and real estate. 'If markets are down investors have more time for alternative investments like hedge funds.'