Absolute return funds find favour

Mark Dampier is enjoying the move by hedge funds into the retail investment market via Ucits III. The head of research at Hargreaves Lansdown was wary of absolute return funds when they first appeared. I spoke to him when BlackRock (then Merrill Lynch Investment Management) launched its Absolute Alpha fund in 2006, and he said he would wait to see if it worked before making any judgements.

Lower risk funds “have to be bang on right”, he said at the time.

Now, he is a fan, with the caveat that the absolute return sector is a mixed bag and some funds are difficult to analyse. The BlackRock fund “did what it said on the tin”, he reckons.

The funds provide retail investors with what they really want (did they but know it), according to Mr Dampier – and he is in a better position to know than most fund managers, who don’t talk to investors very much.

Before the technology boom and bust people didn’t really get the relative return approach of fund managers. When technology funds went down 75 per cent, people thought the managers must have run off with the money, says Mr Dampier. They found it incredible that managers didn’t sell shares they thought were hugely overvalued.

It is a strange industry in that respect – running money in a way that does not answer the needs, or expectations, of its customers. The hedge fund industry has done investors a service in that respect – bringing a different mindset to the job. On the flip side, it also brought high charges and an expectation that fund managers should earn shedloads of money for their (often illusory) skills.

Mr Dampier thinks hedge fund managers get paid far too much, and he objects strenuously to performance fees. He does not buy the argument that they align interests – they just line the pockets of fund managers, he says.

I am sure he will share his views with the hedge fund managers who come visiting to sell their new Ucits III wares to Hargreaves Lansdown. Let’s hope they pay attention, and resist the temptation to flog funds where any outperformance produced gets paid away in performance fees.

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FTfm's specialist writing team offer their insights into the global fund management industry.

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Pauline Skypala has been editor of FTfm for four years having previously been deputy personal finance editor. She joined the FT in 1999 and has been writing on savings and investment issues throughout her career.

Steve Johnson, FTfm deputy editor, has been a journalist for 17 years, 10 of which have been with the FT.

Sophia Grene, reporter on FTfm, has been a financial journalist in print and online for 12 years.

Ruth Sullivan has worked as a financial/business journalist and foreign correspondent and for the past 10 years has been at the FT.