Chris Gower

The assets that are the subject of hedge funds are extremely wide-ranging, including futures, options, shares and bonds. One of the key characteristics of hedge funds is that their performance is not measured against a benchmark or index. Rather, the focus is on trying to deliver a positive return for the investor – whatever the circumstances and prevailing market conditions. Good hedge fund specialists are highly sought after – and the headhunting and recruitment process in this area tends to be the preserve of niche firms such as Lawbrook Partners. This firm’s co-founding partner and CEO, Chris Gower together with co-founder Gilly Cheshire have many years’ experience in the investment management niche. Here, Chris Gower looks at what hedge funds are and how and why they are used.

Hedge funds belong to that very wide category referred to as ‘alternative investments’ which covers a diverse array of products consisting of any investment type that does not fall into one of the three traditional asset classes of stocks, bonds, and cash. Hedge funds were first devised in the United States in 1949 – although it was not until the late 1980s that they began to take off in terms of popularity with investors. As Chris Gower discusses, they carry a higher risk profile than many other types of fund and investment opportunity. As such, they are almost always used within the context of a portfolio as opposed to being considered as an appropriate stand-alone investment. There tends to be a low correlation between hedge funds and traditional investments – and this is especially the case where markets are declining. As such, they can be a useful way of ensuring diversification within a balanced investment portfolio.

A successful hedge fund manager needs to have very specific talents. The successful construction of a hedge fund portfolio requires a skill-based approach – involving investing in a diverse range of financial instruments and markets with a view to achieving a specific risk profile and, ultimately, an acceptable return. With some forms of investment, the fund manager can rely almost exclusively on asset appreciation and rising markets. Hedge funds are different. The returns achievable derive mostly from the skill of the hedge fund manager; on whether he can formulate and then execute an effective strategy.