Funds of hedge funds can 'protect against volatility'

A hedge fund expert has highlighted the advantages of investing in funds of hedge funds to compensate for equity market volatility.

Alex Dolbey, a partner with responsibility for charities business at investment firm Fauchier Partners, told Third Sector that a product such as Cazenove's Absolute Return Trust for Charities would provide trustees with "a good night's sleep" at times when equities were undergoing stress. The ARTC is run by Fauchier.

"In July, when the FTSE fell 3 per cent, the fund was actually up by 2 per cent," Dolbey said. "Indeed, in the five years of its life it has only once fallen by more than 1 per cent, and then only by 1.1 per cent."

Dolbey added that a further advantage of such funds was that they showed very low volatility. The ARTC has a volatility of less than 3 per cent annualised over the past four years, compared with a gilt volatility of more than 4 per cent over the same period.

"We are seeing a trend among charities to switch away from bonds, whose returns are seen to be pedestrian, at best, in the near future," Dolbey said. "Some charities are also switching out of equities as they look to take profits after a prolonged period of out-performance."

Paul Palmer, professor of voluntary sector management at Cass Business School, said: " The move to hedge funds is welcome and indicates a growing trend of sophistication by charity investors in creating a properly diversified portfolio."

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