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FOFs still popular despite numbers

FUND of Hedge Funds may have failed to deliver expected returns over the past three years, yet they still outperformed most other assets classes, pending currency movements.

In addition, the absolute risk of Fund of Hedge Funds (FOF) on a hedged basis is lower than all other asset classes apart from international fixed interest and cash.

The findings, by van Eyk Research, were based on worldwide interviews of 15 FOF managers.

Director of van Eyk research Mark Thomas said hedge funds were rapidly moving into mainstream acceptance.

“Due to their attractive risk-return profile and the low correlation with other asset classes, many asset allocation models typically recommend a large allocation to hedge funds, which may not be feasible considering the added risks of hedge funds which are difficult to quantify,” he said.

Another term for hedge funds is Absolute Return Fund, as the aim of such funds is to produce consistently positive returns in both rising and falling markets.

The number of ‘absolute’ hedge funds has grown considerably over the past three years. Research by ASSIRT indicates that 40 new managers were launched between 1999 and 2001.

Van Eyk Research says most FOFs are aiming to achieve absolute returns of 12 to 15 per cent net of fees over three years.

Van Eyk researcher Dragana Timotijevic said most managers were now reviewing their forecasts downward, however.

“Given current cash rates at historically low levels, FOFs believe they can achieve absolute returns between 7 per cent and 9 per cent,” Ms Timotijevic said.

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