Sophisticated investors believe that hedge funds offer the potential for strong returns in the current environment, says the Association of Investment Companies.

Recent figures reveal that 15 per cent of savvy investors believe hedge funds currently offer the potential for strong returns. However, they are also concerned about their perceived lack of transparency and riskiness.

A further 14 per cent voiced fears over the lack of regulation surrounding the hedge fund industry, and 12 per cent are concerned about the reputation for high charges.

Although some sophisticated private investors are wary of hedge funds, six per cent of those surveyed are already investing in hedge funds, and five per cent have invested in the past.

Interestingly, nearly half of investors believe they may possibly invest in hedge funds in the future, while only 29 per cent of investors surveyed said that they would never invest in hedge funds.

Annabel Brodie-Smith, communications director of the AIC, says, ‘Many of these investors’ concerns over hedge funds are addressed through the listed hedge fund and fund of hedge funds sectors. The listed structure of closed-ended hedge funds and fund of funds means investors have access to a much higher level of transparency. Shares in listed funds are available on the stock market just like any other share so they are available to those of modest means as well as the super wealthy.
 
‘It is important to have a balanced portfolio, but providing this is in place, listed hedge funds and fund of funds can enhance the diversity of your portfolio. There are some single strategy hedge funds in this sector; most are fund of hedge funds which aim to spread the investment risk across a number of hedge funds.’

The hedge fund sector is taking steps to address these issues and earlier this year introduced the Hedge Fund Standards Board, which recently saw ten new hedge fund managers sign up to adhere to its standards of best practice.

Antonio Borges, chairman of the board, says, ‘At a time when the activities of hedge funds are under such intense scrutiny, it is more important than ever that the industry demonstrates it is living up to its responsibilities by adhering to the best practice
standards.’