Expanding the Connection Fund Offering: An Introduction to Hedge Funds
3 December 2015
Over the last two years Connection has offered a variety of funds to investors across a range of strategies. We are delighted to be expanding our offering into the hedge fund space, providing access to funds in a wider selection of asset classes across a range of liquidity terms and return profiles. Minimum initial investments for hedge funds typically start at $1 million, limiting access for many private investors, but the Connection Capital model, collating qualified private investors and investing through a nominee, will allow Connection clients to participate in multiples of £25,000.
What is a Hedge Fund?
The term ‘hedge fund’ refers to a legal structure, rather than a specific investment strategy and is a broad term for investment vehicles targeted at more sophisticated investors. Hedge funds are less constrained in terms of investment approach than are traditional mutual funds and are able to make use of short positions and leverage, although not all funds will do so. There are over 10,000 hedge funds currently active, with assets under management of approximately $3 trillion, according to HFR (Hedge Fund Research).
The strategies accessible in the hedge fund space range from liquid equity, global macro and algorithmic and systematic strategies to, at the less liquid end of the spectrum, direct lending and funds buying distressed debt with a range of liquidity and risk/return profiles in between. Investment managers may have a directional bias in a specific market or may aim to limit exposure and correlation to traditional asset markets as much as possible.
Hedge funds have traditionally offered open-ended structures, allowing monthly subscriptions and monthly, quarterly or annual redemptions, but increasingly funds in less liquid assets will have a drawdown structure, providing a more appropriate asset/liability match.
In the past, hedge fund investors were typically high net worth individuals, fund of hedge funds and family offices, but over time hedge funds have become a more institutional product with pension funds, insurers and endowments now the largest investors in the space. This has led to a bifurcation in the industry between the larger more ‘institutional’ hedge fund managers offering higher liquidity, lower returns and lower volatility to institutional clients and smaller, more opportunistic managers still servicing the family office and high net worth community, who are prepared to look at more innovative strategies, longer lock-up periods and early stage or emerging managers in return for more attractive return profiles and greater access to portfolio managers.
Why Invest in Hedge Funds?
Adding carefully selected hedge funds to our product offering opens up a range of otherwise inaccessible investment strategies and asset managers to Connection clients. Hedge funds can provide attractive, differentiated returns as well as portfolio diversification via access to strategies and asset classes not available through traditional long-only funds or private equity vehicles.
The Connection Approach
In common with our approach to private equity and real estate, Connection makes use of an extensive network of experienced finance professionals to source opportunities in the hedge fund space. Our focus on niche strategies and small and earlier stage investment managers provides access to a diverse range of strategies with potential for attractive returns.
We look for investment managers who have a strong alignment of interests with their investors via significant investment in their own funds and we undertake extensive due diligence and present an assessment of the opportunity and associated risks to our clients. Over time we aim to present a set of opportunities reflecting the diverse nature of the hedge fund universe and encompassing a range of markets, geographies, asset classes and return profiles.