For Immediate Release July 15, 2002

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21% of existing fund investors may buy hedge funds

About one-fifth of fund investors who currently invest in traditional funds may buy hedge funds, according to a survey commissioned by the Hong Kong Investment Funds Association ("HKIFA") in June 2002.

This is probably the first SAR-wide survey that tracks the local population's attitude towards hedge funds, in the wake of the release of the Hedge Fund Guidelines by the Securities and Futures Commission in May.

HKIFA commissioned NFO WorldGroup - Hong Kong to conduct a telephone survey in June 2002. 1,000 fund investors and 500 non-fund-investors were interviewed.

Survey findings

Out of the fund investors interviewed, 21% indicate they will or may buy hedge funds. 50% will not and 16% are not sure yet. The rest cannot comment because they don't have any knowledge about hedge funds (14%).

As for non-fund-investors, 2% indicate they may buy hedge funds. 63% will not and 8% are not sure. The rest - 27% - cannot answer because they do not have any knowledge about hedge funds.

21% of existing fund investors say they may or will buy hedge funds. This is an encouraging start as hedge funds are relatively new to the local retail market.

As to why people are not interested in buying hedge funds, unfamiliarity is cited as the key factor - 51% of non-fund-investors and 42% of fund investors are not interested in hedge funds because they are not familiar with the operation of these products.

Experience from overseas markets indicate that the early adopters are usually the more informed and sophisticated investors; and the rate of take-up is usually measured. We believe that with more investor education, interest in hedge funds will steadily increase.

There is generally a high level of awareness of hedge funds amongst fund investors. Out of the fund investors interviewed, 63% indicate they have heard about hedge funds, whereas only 37% of non-fund-investors have heard about these products.

More people tend to associate hedge funds with high risks and high returns.

Amongst fund investors who have heard about hedge funds, 54% believe that hedge funds are "high" or "very high" risk products. 24% believe they have "medium" risks. 8% think the risk level is "low" or "very low".

In respect of investment returns, 44% think that hedge funds can bring "high" or "very high" level of return. 29% believe they can bring "medium" return. 10% think the return level is "low" or "very low".

Amongst non-fund-investors who have heard about hedge funds, a high percentage - 41% - do not have any idea about their risk/reward characteristics. 35% believe that hedge funds are "very high" or "high" risk products. 16% believe they are of "medium" risk. 8% think the risk level is "low" or "very low".

As for investment returns, 25% opine that hedge funds can bring "high" or "very high" levels of return. 19% believe they can bring "medium" return. 15% think the return level is "low" or "very low".

In fact, 'too risky' is one of the most commonly cited reasons for not buying hedge funds - 39% of fund investors and 20% of non-fund investors indicate so.

However, in fact, the risk/return profiles of hedge funds vary substantially, depending on the strategies adopted.

The term 'hedge fund' encompasses a wide array of investment strategies and the risk/return profiles vary substantially amongst the various styles.

Furthermore, as hedge funds are very skill-based, i.e. the investment results rely more on the skill of the manager rather than the movements of the underlying market, there is much dispersion in the returns even amongst funds with the same style.

Also, the impact of a hedge fund on an individual's portfolio depends to a large extent on the correlation with other investments within the portfolio. Thus, it may not be appropriate to generalize and simply equate hedge funds with high risks and high returns.

Amongst those who may buy hedge funds, the main reason cited for the interest is that they expect that the returns are higher than traditional unit trusts/mutual funds (44%). In addition, 22% of the interviewees reckon hedge funds can provide diversification to the investment portfolio. 9% are of the view that hedge funds can make money no matter whether the market is up or down. 9% indicate they may buy if banks recommend these products.

The findings indicate that a key reason why people would consider hedge funds is that they believe they can produce higher returns than traditional funds.

While this observation may be valid in some circumstances, it may not be so in other cases because the performance depends on the types of strategies used, the prevailing market conditions; and above all the manager skills.

But what is probably valid is that as pointed out by some investors, when used effectively, hedge funds are capable of bringing diversification to one's investment portfolio because of the low correlation with traditional investments such as stocks or bonds.

Unlike traditional unit trusts/mutual funds that are tied closely with the risk/return profile of the traditional asset classes that the fund invests in or benchmarked against, hedge funds focus on absolute returns, i.e. to achieve positive returns in all market situations.

However, while hedge funds may enable one to profit in both falling and rising markets, they do have risks. Due to the use of investment strategies such as short selling and leveraging which are typically used very restrictively or not at all in traditional funds, there is the possibility of considerable risk of volatility and loss of capital if not managed properly.

Furthermore, hedge funds tend to require a lock-up period, say a few weeks to few months, because unlike traditional funds, hedge fund strategies often require more time to unwind their positions to raise cash to return to investors.

Thus, it is important for investors to understand the investment strategies that hedge funds employ and their risk/return characteristics before buying into these products.

To ensure that investors can make informed decisions about hedge funds, we believe it is crucial to raise the public's understanding of its features, benefits and risks.

Towards this end, HKIFA has prepared a set of educational materials, which include:

	A table comparing hedge funds with traditional unit trusts/mutual funds;
	A table comparing fund of hedge funds and traditional fund of funds;
	A list of questions that investors should ask before they invest in fund of hedge funds; and
	A glossary of key terms on hedge funds.

These educational materials can be downloaded from HKIFA website (http://www.hkifa.org.hk), under the section "Unit Trusts".

The HKIFA has 45 fund management companies as full/overseas members. It has 48 Associates, which include trustees and other professionals that are involved in the creation and administration of funds.