A (not so) risky endeavor
By Timothy Sifert
Hedge funds are peculiar investment vehicles: they often evade definition, and when they are clearly defined by fund managers, potential investors often still find them obscure at best. That is one reason why in this country, with a comparably novice investor class and under-developed capital markets, hedge funds simply do not exist as they do in the west.
What do exist here are regulated investment closed-end funds that employ some investment strategies - arbitrage and leveraging - that are often considered the backbone of true hedge funds' investment strategies.
And it's companies like Skarbiec Towarzystwo Funduszy Inwestycyjnych, which will begin operating one such closed-end fund in July, that aim to bring about improved investor education and lofty investment returns that will make Poles, like their western counterparts, warm to the idea of credit a hedge fund.
And should Skarbiec's fund be a success - however that will be defined - the company will consider further variations on the hedging idea, opening the somewhat esoteric investment strategy up to a host of new investors.
"We would like to continue with an innovative approach and hedge funds are a topic that is definitely emerging from the United States," said Marcus Nagel, chief executive officer at Skarbiec Asset Management. "And in Poland we are going more towards total return investment strategy."
He said one of the reasons Skarbiec is turning toward a "total return" strategy, whose goal is to return as much as possible rather than matching it to a benchmark, is because the ability to earn through direct stock exchange indexed investments, at present, is restricted.
"We are moving more toward the trend we are seeing on the western capital markets, where the possibility to earn on the market is rather limited," Nagel explained. "Or everyone expects that they will be (earning) within a certain range, and therefore the concept of a total return fund is getting stronger."
In July Skarbiec will begin operating Sezam IV, which some press reports have dubbed as the first Polish hedge fund, even though Nagel refutes the definition, declaring it an investment vehicle in which hedging and leveraging strategies will be employed.
The company is at present concluding talks with private investors, who will each pony up as much as zł. 10 million (E2.24 million) to be part of a regulated fund that would invest in employing hedging strategies.
"A hedge fund is a big word," he said, noting that in the west Sezam IV would not be called a hedge fund.
In the U.S. "hedge fund" is a general term to describe a rather unregulated and unadvertised investment pool used by sophisticated investors wanting to eliminate a part of the inevitable risk involved in holding long stock positions. Some ways to do this include short-selling or leveraging assets to buy other securities.
However, hedge funds, which have gathered pace and interest particularly among American individual and institutional investors, need not actually hedge investment risk to be considered a hedge fund. It is more their unregulated, sometimes secretive nature that defines them, as well as the fact that they are often limited in the number of investors they allow into the fund.
Nagel pointed out that it is for these reasons that Polish investors needs something slightly different: a vehicle that employs modern investing techniques but also protects investors because it is kept under regulation. What is more, he said, the law does not allow Warsaw Stock Exchange (WSE) investors to perform the variety of investment techniques practiced in the west.
"It can be done (here) under a regulation," he said. "There's a clear trend to make these funds more accessible to retail clients and therefore you need to have a certain legal framework which protects the clients in case something goes wrong; so, yes, we are trying to move in total return funds."
But not all investment houses are keen on pursuing anything resembling a hedge fund.
"Our clients don't ask us for such products," said Tomasz Dacewicz, portfolio manager at ING Fundusz Inwestycyjny Otwarty Gotówkowy. "Our stock market is very shallow and there is not a lot of opportunity."
Besides the investors that Skarbiec notes are interested in branching out to the investment horizons, there are indeed others in the country who - even with little experience - might be soured on the hedge fund idea.
The zł. 64-million (E14.4-million) Pioneer Arbitrage Specialty Investment Fund, a part of Pioneer Pekao Investment, is probably the closest thing the country has to a true hedge fund.
With this fund, which returned 5.4 percent in the last 12 months, "some investors were not satisfied," said Andrzej Szeworski, vice president at the fund management company.
Pioneer launched the fund in March 2002 with the aim of spotting arbitrage opportunities on the WSE. But since it completed the research on which it based its investment strategy, Szeworski pointed out, stock turnover has fallen and the market has become more efficient - both anathema to an arbitraging investment strategy.
Also, he pointed out, falling bank interest rates are a further drag on returns, because when a portfolio manager cannot find arbitrage opportunities he invests in the money markets. At present the company is devising a way to solve the problem of poor returns, even offering unsatisfied investors an escape from the fund before its 2005 close.
And while Skarbiec's Nagel is positive about the Sezam IV fund, he insists it's just a way of testing the "appetite" for more new western products. He said Poland would still have to wait a few years to determine whether the venture proves to be a success.
