“Look at the fund objectives as these can vary dramatically, and ensure they are aligned with your client’s investment objectives.
“The experience of the fund management team can also significantly influence performance goals. As such, it is important to pay particular attention to the fund managers, their credentials, ethos and past performance,” she explains.
JPMorgan Asset Management, however, disagrees that utilising a short strategy has to increase the risk within a portfolio.
Callum Abbot, Portfolio Manager for the JPM UK Equity Plus Fund and JPM UK Equity Core Fund explains: “Investors should be aware of whether a fund is using short positions as part of an absolute return strategy (hedge fund) or to help beat the benchmark (active extension/130:30 funds like JPM UK Equity Plus).
“Shorting can be a bit of a bogey word but advisers should be aware that shorting does not have to increase the risk of a fund.
“For example, the average active UK equity fund manager is long only and on average has a 30 per cent overweight to mid and small-cap funds, which is a big size risk.
“In JPM UK Equity Plus we go long the mid and small-cap stocks we like but offset this position by going short those we do not, which means that we do not have to have a big size bias in the way many of our peers do – we are actually using shorting to control risk.”
Montlake’s Mr Delamare agrees: “Shorting is not necessarily riskier than investing long, however you have to know what shorting activity the portfolio manager will conduct and to what level, as you have funds that are exclusively shorting that can be more volatile than say a market neutral fund, that is trying to protect you from market swings and have lower volatility.”
As with anything related to investing, cost also plays a major part in any adviser/client portfolio decision.
According to Ms Hicks, funds that have the ability to go short as well as long tend to be significantly more expensive than the more common long-hold strategies as a result of trading costs.
However, she adds: “Mifid II has strengthened the requirements on disclosing fees and charges, therefore additional costs should be justified in line with the client’s requirements.”
Exploring different investment avenues and the potential benefits and risks associated with them can be daunting for advisers and their clients alike. There is no denying that alternative investments are becoming more prevalent in client portfolios as both they, and the markets, become more sophisticated.
Making the right call ultimately comes down to research and due diligence.
“The key thing to understand is who will be managing the fund and running the strategy. The person or team needs to have the relevant experience and proven track-record whether that be in UCITS or other vehicles such as offshore or managed accounts,” concludes Mr Delaware.
