Private equity and property: best long-term investments

Private investors should look past the glitz surrounding hedge funds and compare their long term performance to other alternative investment classes such as private equity and commercial property, according to research from private equity network Hotbed.

According to the CFSB/Tremont Hedge Fund Index, in the last six months, hedge funds have returned -0.37% to investors. Gary Robins, chief executive of Hotbed, says: “With both private equity and commercial property the investment manager has the chance to improve the performance of the investment through active management. That’s a route to adding value that isn’t open to the typical hedge fund.”

And although hedge funds have been grabbing all the headlines of late, some commentators are beginning to raise concerns over their high charges, lack of transparency and the shortage of regulatory scrutiny that this sector is subjected to. Add to this the significant drop-off in their performance this year.

Robins adds that although there are some great hedge fund mangers such as Man Group, which are stringently controlled, there is also a history of some catastrophic losses in the sector. Something that may show up in the performance figures of fund-of-fund investments, which are the usual way for smaller private clients to invest in hedge funds.”

He explains: “Hedge funds vary greatly, and even if you invest direct, it can be difficult to know exactly how that fund operates. In any case, to invest direct, you need a large amount of capital behind you, typically more than £0.5m. This is out of the reach of most individual investors, particularly if hedge funds are only one part of a diversified portfolio, as any alternative asset should be.”

But if you invest in a fund-of-funds, which is the more usual route, there is even less transparency and an investor forfeits control of what he invests in, added to which you are looking at steep management fees, typically up to 2% annually plus a 20% share of any profits.

Robins says that difficulty in accessing suitable opportunities alone and lack of control over investment decisions if investing via a fund-of-funds have, in the past, also been a problem for would-be investors in private equity and commercial property, but the long-term nature of the asset class and an increasing transparency for investors has helped to overcome this.