Investors looking to gain hedge fund exposure are choosing structured products, which use derivatives to gain exposure to funds-of-funds over direct investments, according to product distributors. The demand for protection is in spite of arguments that a well-diversified funds-of-funds has low volatility and should not need capital protection and the views of some structurers that fund derivatives are too pricey to make products attractive.
Frances Clayton, director at Tilney Investment Management, part of the Tilney Group with GBP4 billion (USD7.4 billion) under management, said, "The level of interest from high-net-worth clients in our structured products is bigger than in the fund of funds." Clayton thinks this trend will continue, as more investors consider hedge funds and see structured products as a starting point.
Structured products also appeal to institutional investors because they can be wrapped in tax and regulatory efficient ways. Marcos Camhis, coo of Capital Management Advisors in Geneva, noted pension fund managers for example may also choose structured products over direct fund of funds investment because of the element of 'career risk' involved in investing in a non-traditional asset class. Camhis, however, warns that the retail end of the market may not realize they have to stay invested in the structure for its full tenor to recoup the capital protection. The premiums for structuring products on hedge funds have reduced around 50% in the last five years, added Camhis, who noted continuing pricing innovation will encourage structuring of fund-linked products.
