The Charity Commission has authorised the funds, which will be available from the autumn.
The fund of hedge funds, the Absolute Return Trust for Charities, will invest in approximately 25 hedge funds and has a minimum investment of ?xA3;50,000.
Hedge funds use a variety of investment methods, such as seeking to profit from the volatility in the share price of companies involved in takeovers, to produce positive absolute returns under all market conditions and protect capital. They are also not correlated to the performance of equities and bonds.
Hedge funds are one of the so-called alternative assets, which include property and private equity, which have become more attractive to charity investors in the light of stock market volatility. They are widely perceived to be the least risky of the alternative assets.
Andrew Ross, chief executive of Cazenove, who has initiated radical changes to the company's investment strategy since joining from HSBC Asset Management at the end of last year, said: "Over the past two years, we have seen increasing interest from charities in new investment solutions to provide diversification and returns uncorrelated to equities and bonds. I believe our new common investment funds will be attractive to charities as it affords them the opportunity to obtain controlled, diversified exposure to hedge funds."
Michael Carpenter, legal commissioner at the Charity Commission, said: "Diversification is an important factor in investment decisions. Hedge funds can provide an extra degree of diversification because they are in a different asset class to equities. Hedge funds aren't for everyone and caution will be required but we think it important that this asset class can at least be considered by appropriate charities."
But the Charity Finance Directors' Group warned charities not to jump into hedge funds just because of poor equity markets. Director Shirley Scott said: "Hedge funds may be appropriate for a small proportion of a portfolio, especially in periods of high volatility. Charity trustees must understand the risks associated with any investment and take proper advice. I will be interested to see what restrictions there are on contributions to the fund."
Cazenove aims to produce a total return from the Absolute Return Trust for Charities of 8 to 10 per cent per annum. Hedge fund investment specialist Fauchier Partners, which is advising Cazenove on the fund, has achieved annual returns of 11 per cent since 1995, but last year only posted 4.5 per cent.
Cazenove is also introducing a high-yield equities common investment fund for charities. The Equities Investment Growth Trust for charities expects to yield a 30 per cent higher return than the FTSE All-Share Index.
The fund is aimed at charities that wish to invest in equities but are dependent on income and will follow strategies biased towards income generation.
The fund has been authorised by the Charity Commission and is to be launched on 1 November.