> Six steps to debt freedom

> Brighten their future

> Gold fever: here to stay?

> Nedbank goes green

> Evaluating performance

> Gold hits 18-month high

> Pay less estate duty

> Why lending will resume

> Positive platinum demand

> Breaking the habit

Today, 22 November 2009

› SACP attacks Malema

› Meteor 'flash' in Gauteng

› Malema attack 'racist'

› Govt settles with Pikoli

› Will cops play brokers?

Yesterday, 21 November 2009

› SACP attacks Malema

› Match-fixing stuns Europe

› JZ hails Miss World effect

› Henry offers replay

› No armchair ride for Boks

You're thinking of investing in hedge funds but haven't quite figured out what risks are attached to such an investment. So what can you do? Well, one option available to you is to invest in a fund of hedge fund — which should give you the positive effect of exposure to hedge funds.

What should you be looking for if you're thinking about investing in a fund of hedge fund? According to Lizelle Steyn, Manager: Alternative Investments at Nedgroup Investments, an overview of the structures through which you can access a fund of hedge funds should look something like the list below.

Ideally you'd want a structure that:
1) ensures you will never lose more than the capital invested;

2) discloses all the fees charged at the different levels of the structure;

3) provides satisfactory liquidity (the ease of investing in and disinvesting from a fund); and

4) channels all income generated by the fund through to you, so that earnings are taxable in the hands of the investor, not the fund. (The actual tax implications will be dependent on your unique situation, combined with the specific investment vehicle chosen. Ideally you should therefore consult a tax specialist for a comprehensive assessment.)

When your investment in a hedge fund is managed within a segregated account, you usually do not enjoy limited liability and all income earned within the account is channeled to you and taxable within your hands.

Five year minimum

The investment vehicle which you may have heard of is the endowment policy. Though it limits your liability to your capital invested, fees permeate several tiers within the structure and sometimes are not disclosed to you.

Your investment is also locked in for a minimum of five years, with the exception of one partial redemption allowed during the term. Unfortunately the income generated by the hedge fund is taxable within the policyholder fund and could potentially be detrimental to you if you're a lower tax rate-payer.

Another structure where the income is taxable within the fund is the company structure, which is particularly punitive to institutional investors, such as retirement funds. Like the endowment policy, it limits potential losses to the capital invested by the investor. Unlike the endowment policy, the reporting of costs to the client is significantly more transparent.

With a trust the income is also taxable within the hands of the investor, who enjoys limited liability, but there are risks depending whether the trust is set up with vesting or discretionary beneficiaries.

The investment vehicles mentions — bar the life policy — all provide reasonable liquidity. However, they're not on par with that of collective investment schemes. This structure would be ideal for retail investors, but regulation under the Collective Investment Schemes Control Act remains elusive.

So until such a break-through occurs, hedge funds remain unregulated and may not be marketed to the public. However, it remains legal to invest in them.