Spanish investors cautious in welcome to hedge funds
12 November 2007, MADRID - Rarely has the approval of a financial product in Spain generated such controversy as the decision to allow sales of domestic hedge funds.
12 November 2007
MADRID - Rarely has the approval of a financial product in Spain generated such controversy as the decision to allow sales of domestic hedge funds.
After lengthy and intense discussion involving politicians, regulators and those working in the financial sector, the first such fund was registered with the stock market commission on November 8, 2006. But one year on, demand for hedge funds has fallen short of expectations.
Spanish regulators were cautious about allowing new funds aimed at small investors after a Madrid-based brokerage collapsed in 2001 with more than €100 million in losses. Asset managers who wanted to sell hedge funds faced the extra costs of setting up foreign units. The minimum investment in a hedge fund was set at €
Hedge funds can borrow at most five times their capital but are exempt from some other regulations on commissions and investments that apply to funds in general.
Under the regulations, funds are able to invest up to 10 percent of their capital in hedge funds or venture capital firms.
According to Iverco, the biggest trading group, over the last year 18 hedge funds, named FIL in Spain, and 30 fund of hedge funds (FFIL) have been registered, worth a total of €
EUR 501 million, and representing 1,950 investors. This is just 0.19 percent of the EUR 300 billion the Spanish investment fund industry manages on behalf of eight million investors.
But Blanca Antoñanzas of Cygnus Asset Management says these figures do not reflect the true picture, given that many funds were not registered until well into this year. "As was foreseen, there is more interest in FFIL than hedge funds. But we'll have to wait until 2008 or 2009 to get the proper picture," she says.
"It's been a steep learning curve," adds Didac Artés, head of Próxima Alpha fund, which includes BBVA bank among its clients. "Potential customers such as banks, pension funds or family offices are only just coming to terms with the product. They are not in any hurry, and growth is pretty much as predicted. We should also bear in mind that it's been a volatile year. That said, the industry is growing. Spanish investors are cautious and slow to take up new ideas."
One of the principal characteristics of hedge funds is that they allow fund managers to invest in any kind of stocks, using leverage to borrow amounts several times higher than the initial investment - in the case of Spain, this has been limited to five times - and then using whichever strategies offer the best return. In the case of the 18 hedge funds operating in Spain, investors have a wide range of options to choose from. There are funds specializing in the property and energy markets, derivatives and currencies, others that use long-short strategies based on the rise or fall of a stock, and even one that specializes in non-traded shares in micro-finance companies.
"A hedge fund gives investors access to the best fund managers; at the same time it offers returns that have little to do with what the market is really doing, so it is the ideal tool for diversifying investment portfolios," says Thiago Vaz, manager of Fidentis, which specializes in long-short strategies on the Spanish and Portuguese markets.
Mónica Vidal, a partner at Nmas 1 says that hedge funds are ideal for clients of private banks. "Contrary to popular opinion, these are ideal for conservative strategies. They are not as volatile as shares, but they are less boring than guaranteed funds. They tend to seek returns of between 7 percent and 9 percent, in line with the objectives of that type of client," she says.
If diversification, range of strategies and superior performance are hedge funds' strong points in comparison to conventional investment funds, among the risks involved are low liquidity, and high commission charges. Most hedge funds recommend a minimum investment of between two and three years to achieve their goals. Furthermore, liquid value in most cases is measured monthly, and getting at your money requires up to two weeks warning, and often comes with a commission for newcomers.
Hedge funds charge around 1.72 percent management commission, and around 0.11 percent of the total investment. Many funds will charge a further commission based on results, which can be up to 20 percent of profit.
Spanish hedge funds have not performed spectacularly in their first year of life: the average return by September on the six funds that the Inverco investment fund association has data on was 1.54 percent down: the Ibex 35 index rose over the same period 0.67 percent.
FFIL funds of hedge funds, meanwhile, charge 1.6 percent management commission, and 0.13 percent on the deposit. Many also charge results-based commission, but this is usually around 10 percent.
"The down side of hedge funds is that they charge very high commissions, very often for doing something very similar to what traditional funds would do," says Fernando Luque, of Morningstar fund rating agency. Perhaps wary of such advice, Spanish investors, it appears, are still hedging their bets.
[Copyright EL PAÍS, SL./ DAVID FERNÁNDEZ 2007]
Subject: Spanish news