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Another option

20 January 2004 Angelo Coppola

A multi-managed alternative investment strategies fund, designed to protect investors from some of the underlying risks of hedge funds, has been launched in South Africa by Investment Solutions (IS).

According to IS the Multi-Manager Alternative Investment Strategies Fund safeguards investors from the potential liability of short selling and leveraging - two of the more risky alternative investment techniques used by traditional hedge fund managers.

Geoff Blount, head of manager research at Investment Solutions: "Although traditional hedge funds have historically succeeded in their objective of achieving absolute returns irrespective of market conditions and their ability to hedge away from market risks, investors need to be aware that a stable return does not imply no risk or low risk.

"Typically, investors have either over- or underestimated the perceived risks associated with traditional hedge funds."

Blount says the risk associated with leveraging occurs when the investment manager borrows money against current investments to make further investments - if these investments are unrewarding, the loss is also leveraged into the portfolio.

Short selling of securities, especially in a bear market dominated by declining equity values, introduces the risk of loss in value. It occurs when the portfolio manager goes short by selling an asset he or she does not own.

If the price of the asset falls, the investment manager profits as he or she can buy it back at a price lower than it was sold for. However, the risk arises when the price of the asset appreciates and the investment manager potentially faces unlimited losses until he or she can buy the asset back at the now higher price and close out the position.

In this instance, investors stand to lose not only their investment, but may under extreme circumstances also have to pay in to cover the losses suffered by the investment portfolio.

"Diversification is imperative in reducing the risks of investing in traditional hedge funds. A multi-manager approach facilitates diversification and the spread of investment risk across many underlying traditional hedge fund managers, using various alternative investment styles, strategies, approaches and philosophies, diminishing the possibility of investment loss," he says.

Combining alternative investment strategies (such as long/short equity, managed futures, fixed income arbitrage, property hedging) results in favourable risk-return characteristics.

Note: The multi-managed alternative investment strategy is offered by Investment Solutions Limited, a registered long-term insurer, as part of this insurer's current product range.

This sentence has been included because it still remains illegal to market or solicit business in hedge funds to the South African investor. Financial services businesses operating locally are offering this wrapped product via their life licences.

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