This new fund is designed to allow participation in the upside of emerging markets while reducing downside risk, replicating the diversification and volatilities of the Eurekahedge Emerging Markets Index.

It has been specifically designed to offer lower volatility exposure to emerging market regions and is being managed by MAXAM Capital Management, who will be able to hedge out risk via short exposure and other techniques.

Matrix argues that, by investing through an enhanced index product, investors have immediately added diversification to their portfolio, as assets are deployed among numerous managers. The Matrix Emerging Markets Index Fund will afford investors the ability to take advantage of the opportunity set throughout the emerging markets investment.

Minimum investment: £10,000
Initial charge: 5%
Annual management fee: 1.95% plus 10% performance fee
Contact: Visit www.matrixgroup.co.uk
Robin Amlôt says:
Matrix’s new fund of hedge funds (FOHF), the Matrix Emerging Market Index Fund, will have around 40 underlying hedge funds. Its portfolio will be broadly diversified across all emerging market regions and all asset classes.

The initial asset mix is 61 per cent equities, 25 per cent fixed income; four per cent currency and three per cent cash. In terms of geographical exposure, the main components are India, China and Latin America – all accounting for 12 per cent each, followed by Africa and the Middle East, each around ten per cent.

Should you be investing in hedge funds? Well, you probably are whether you want to or not. A recent survey by financial consultant Watson Wyatt reported that UK pension funds are boosting their allocations to hedge funds. For example, last year pension fund exposure to fund of hedge funds almost tripled.

What makes a hedge fund different? Broadly speaking, hedge funds seek to buy and sell mispriced assets. One figure you’ll hear bandied about is ‘standard deviation’. This is a measure of volatility. In theory, a fund of hedge funds will have a lower standard deviation than just one fund, while the fact of diversification of investment will allow the FOHF to benefit from the different investing styles of various hedge funds.

Gains on these investments qualify as capital gains. This means that the tax rate on them is being lowered to 18 per cent. However, remember that you should not invest solely because of the tax status of the investment.

The outlook for hedge fund performance this year is distinctly mixed. When it’s good it’s likely to be very, very good – market volatility should actually help hedge funds – but when it’s bad it’ll be really, really bad.

Expect more hedge fund failures through the year. Given the pressure some are under as a result of the combination of tighter credit lines, illiquid investments and investor withdrawals, some funds are using ‘gates’. This means they’re limiting the amount that investors can take out each quarter. Some funds have even suspended investor redemptions entirely.

The risks are large – be aware of that. But the rewards can be too. Back-tested to the beginning of 2000, the launch portfolio of the Matrix Emerging Market Index Fund would have provided total returns of 305 per cent, with a maximum drawdown of 9.71 per cent. However, this is not for grandmothers, orphans or widow’s mites.

2 Stars
Robin Amlôt is senior editor at Moneyextra