Hedge funds are pooled investment vehicles that use sophisticated strategies to generate returns uncorrelated with traditional share and bond markets. Unlike a standard managed fund, hedge funds may use short selling, leverage, derivatives, and complex arbitrage strategies to generate “absolute returns” — positive returns regardless of market direction.
Access to hedge funds in Australia is almost entirely restricted to sophisticated and institutional investors. However, some listed alternatives and managed funds provide retail investors with exposure to hedge fund-like strategies.
What Strategies Do Hedge Funds Use?
Hedge funds are categorised by their investment approach:
| Strategy | Description |
|---|---|
| Long/short equity | Buy undervalued shares (long); short-sell overvalued shares (short). Reduces market exposure. |
| Global macro | Takes positions in currencies, interest rates, and commodities based on macroeconomic views |
| Arbitrage | Exploits price differences between related securities (merger arbitrage, convertible arbitrage) |
| Market neutral | Attempts to generate returns with zero net market exposure (equal long and short positions) |
| Multi-strategy | Combines multiple approaches across asset classes |
The key distinction from traditional managed funds: hedge funds aim for absolute returns — positive returns in both rising and falling markets — whereas traditional managed funds aim for relative returns (beating a benchmark index).
Hedge Fund Access in Australia
Wholesale investor threshold
Direct hedge fund access requires meeting the wholesale investor definition under the Corporations Act 2001:
- Net assets > $2.5 million, or
- Gross income > $250,000 per annum for each of the last two years, or
- Accountant certificate confirming sophisticated investor status
This effectively excludes most retail investors from direct fund investment.
Listed alternatives on the ASX
Several ASX-listed managers operate funds using strategies similar to hedge funds:
| Company | ASX code | Approach |
|---|---|---|
| Platinum Asset Management | PTM | Long/short global equity — active contrarian manager |
| Regal Funds Management | RF1 | Multi-strategy alternatives including long/short |
| Perpetual Diversified Real Return Fund (PPIF) | PPIF | Multi-asset, defensive absolute return |
Note: These are listed investment companies (LICs) or listed investment trusts — you buy shares on the ASX. They may trade at a premium or discount to their net asset value.
Retail managed funds with alternative strategies
Some managed funds available via platforms (like HUB24, Netwealth, or Australian Unity) offer absolute return or long/short strategies to retail investors. These are less common and typically carry higher fees than index funds.
Hedge Fund Fees — The 2-and-20 Structure
Traditional hedge funds charge:
- Management fee: 2% per annum on assets under management (regardless of performance)
- Performance fee: 20% of any returns above a specified hurdle rate (often the risk-free rate)
This fee structure significantly affects net returns. A fund returning 15% gross would deliver ~10% net after 2% management and 20% performance fees.
Australian-listed alternatives and managed funds typically charge lower fees than offshore hedge funds, but fees remain substantially higher than passive index ETFs (which start from 0.07% MER).
Do Hedge Funds Beat Index Investing?
The evidence over the long term is mixed at best:
- A widely cited 2008 bet between Warren Buffett and hedge fund Protégé Partners saw a simple S&P 500 index fund return 7.1% annually over 10 years (2008–2017) vs 2.2% annually for a fund-of-funds portfolio of hedge funds — after fees
- Research from Morningstar and SPIVA consistently shows most actively managed funds (including hedge-like strategies) underperform passive alternatives over 10-year periods after fees
- However, some specific strategies (merger arbitrage, volatility arbitrage) have shown genuine return potential in specific market conditions
- During sharp market downturns, some long/short and market-neutral strategies have preserved capital better than long-only equity funds
The high fee burden remains a significant obstacle to outperformance at the hedge fund level. General information only.
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Frequently Asked Questions
Can ordinary Australians invest in hedge funds? Direct hedge fund investment in Australia is restricted to wholesale (sophisticated) investors. Retail investors can access some hedge fund-like strategies via ASX-listed companies (Platinum, Regal) or certain retail managed funds — but availability is limited compared to the offshore hedge fund universe.
Are hedge funds worth the fees in Australia? The evidence suggests many hedge funds fail to deliver returns sufficient to justify their fees versus low-cost passive index funds over long periods. Top-tier hedge funds with genuine edge exist but are typically accessible only to large institutional investors. For most Australian retail investors, diversification through low-cost index ETFs provides better risk-adjusted returns after costs.
What is the wholesale investor threshold in Australia? To qualify as a wholesale investor under the Corporations Act 2001, you generally need net assets exceeding $2.5 million (excluding your primary residence), or gross annual income exceeding $250,000 for each of the last two financial years, or a certificate from a qualified accountant. Wholesale investors can access financial products not available to retail investors.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.