By MARCEL PORCHERON 22/08/2007
The Merrill Lynch (soon to be renamed BlackRock) UK Absolute Alpha fund is due to appear on several fund supermarkets in September. This is significant because investors through fund supermarkets such as Cofunds or FundsNetwork have to date been restricted to ‘long only’ equity funds, which tend to rise and fall with the market. The UK Absolute Alpha Fund combines ‘long’ investing with ‘short’ investing, one of the most popular hedge fund techniques, which allow the fund to benefit from both rising and falling markets.
We see this investment style as a useful component in properly diversified portfolios. However, investors should remember that there are risks associated with investing in single strategy and single manager funds and so UK Absolute Alpha should only make up part of a portfolio of alternative assets.
We spoke to the fund’s manager Mark Lyttleton to find out more.
How does the fund achieve its objective?
“I invest in UK equities as per conventional funds, but also use financial instruments called derivatives which allow me to benefit from falling share prices (called ‘short’ investing). While this is a popular technique amongst
hedge funds, UK Absolute Alpha was the first UK authorised retail unit trust to use this technique. However, unlike many hedge funds I can’t borrow money, which avoids excessive risk.”
What are the different investment strategies you use?
“All the funds I manage focus on adding value through my views on individual stocks. However, this fund allows me to exploit these views in a variety of ways. At the simplest level I can buy shares that I believe will rise in price and ‘short’ shares I believe will fall. I can also combine these techniques through a ‘pairs’ trade, by buying and shorting two companies in the same sector, which helps remove market risk. In extreme circumstances I can move up to 100% of the fund into cash, giving me plenty of flexibility.”
What performance characteristics should investors expect?
“The fund seeks to generate positive absolute returns in all market conditions. Because some of the fund will always be positioned to protect it from market falls, I would expect to lag conventional long-only funds in rising markets. Conversely, I would hope to have the upper hand during falling
markets. Investors should expect consistent returns due to the fund’s low volatility and low correlation with the rest of the market. It should help you to sleep peacefully at night, especially during difficult periods in the market!”
Changes to the Fund
There have been a variety of changes made to the Fund recently:
- The fund can now be bought and sold daily.
- The minimum lump sum investment has been reduced from £10,000 to £1,000 and it is also available to regular savers from £50 per month.
The new ‘P’ class units will introduce some additional administrative changes from 1 September:
- The fund will be available through Cofunds and FundsNetwork.
- The performance fee will be reduced to 20% of out-performance of 3-month £ LIBOR (currently about 6%) which is set quarterly in advance.
- The annual management charge increases from 0.5% to 1.5% including 0.5% ongoing commission.
- A high water mark will be used so BlackRock only collect a performance fee if the fund exceeds previous highs. This will be reset at the end of each financial year.
- The existing Class A units will be limited issue so no further investments can be made into this unit class other than for existing investors who have an ongoing regular savings plan.