Mark Dampier: An investment for bears and bulls

The Analyst

I hardly need to say what a dire decade this has been for the UK stock market. We have now had two falls of 50 per cent in the stock markets and many investors have become disillusioned. That said, the further the market falls the more confident I become about the long term future. The trouble is that I can't tell you if the market will fall further from here or if we have already seen the bottom.

Those investors who want to hedge their bets have been turning to a new breed of funds that make use of new fund regulations known as UCITS III. Yes, I know it sounds like some kind of missile defence system, but in simple terms it gives fund managers more tools to make profits. In essence they allow funds to "go short" and benefit from shares that fall in price.

Short-selling, and the associated hedge fund industry, has been made a scapegoat by politicians who are both economically illiterate and desperate to deflect blame from themselves. Contrary to popular belief, hedge funds did not ruin the banks, they were simply the messenger that brought bad news. If we look over history we can see that often it's the messenger who gets the bullet.

SVM, a small Scottish boutique headed by Colin McLean, has just launched its own UCITS III fund enabling them to potentially make profits in both down and up markets. It is called SVM UK Absolute Alpha. Experience is an attribute missing from many fund managers today, but Mr McLean has 35 years of investment under his belt. He has also managed a hedge fund quite successfully since 1992. The fund will invest mainly in the UK stock market with a bias towards larger companies. Its aim is to capture most (but not all) of the market's return during bull markets and then to protect investors' assets and limit their losses during bear markets. Many people think that's what fund managers do anyway, but in fact most fund managers have to be fully invested in the market at all times hence why they can't do much to protect their fund from market falls.

Mr McLean will seek out attractive shares in companies that are seeing earnings upgrades or that have positive profit expectations. When searching for shares to "short" the emphasis is on spotting firms with flawed business models. On average, across a market cycle, SVM expect the fund to be approximately 50 per cent long and 50 per cent short, but at any given time the exposure could look very different to this.

Managing this type of fund is no easy task and requires experience and a huge amount of attention (some luck also helps!). The fund is relatively aggressive for an absolute return fund and should sit at the higher risk end of sector. Colin McLean's existing fund has been significantly short of the market for the last 12-18 months which in itself has been a tremendous call, but fund managers simply cannot get these calls right all the time.

The aim of the fund is to beat cash over a year and beat the FTSE All Share Index over a full market cycle. This is no easy task, but for those investors who want to hedge their bets this fund may well be the solution. The only thing I don't like about the fund is its performance fee. I never find these particularly helpful or transparent. Indeed, with LIBOR rates so low at present the fund doesn't have much of a hurdle to overcome before it can start charging the fee.

This hasn't put me off adding the fund to our Wealth 150 list of favourite funds, but it is something that investors need to be aware of. I wouldn't blame anyone for being put off by the performance fee, but despite this extra charge I believe the fund will do a good job for investors over the long term.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent