Morley offers less risk

Morley Fund Management is planning to launch a range of "hedge-light" products hedge funds that promise to bring investors high returns with low risk early this year. The company has been conducting research and pilot tests on internal funds in order to develop its capability in this field.

Morley Fund Management is part of the CGNU group that was formed from the merger of Norwich Union and CGU. This makes it one of the biggest insurance companies in the UK, with £100bn under management, 80% of which is insurance company funds. The remainder is in external funds, including retail funds such as unit trusts and open-ended investment companies. This 20% is marketed under the Norwich Union brand. Morley Fund Management runs all the insurance company money for CGNU and also runs its own third-party pension business.

Using a quantitative research team, which gained its experience at Hendersons and NPI, Morley separated the market into quintiles and found that the bottom quintile underperformed by a greater degree than the top quintile overperformed. The team found that the extent to which poorer stocks underperform allows greater opportunities for shorting than the top end of the market offers for going long.

Gerald Holtham, chief investment officer, summarised the conclusions of the research: "It is easier to pick stocks that are going to do badly than stocks that will do well."

Holtham believes that most of the money coming into the market is chasing the few obviously good stocks, but there is more inefficiency and, as a result, opportunities to make money at the lower end of the market.

Based on this research, Morley is planning to offer a long/short fund as an overlay on an index fund. This is currently being road-tested using internal seed money. Holtham has approached the pensions market to gauge what the response would be to a fund of this sort but has encountered some resistance.

He believes that pension funds' consultants are wary of a fund of this nature because they see it as a hybrid that doesn't fit into any one category and they would rather allocate assets to either a passive or an active fund.

Morley is also planning to use this research to launch a closed-ended hedge fund vehicle aimed at the investment trust market in the next few months. In addition, it is investigating the possibility of setting up a fund of hedge funds.

The group currently runs over £50bn as with-profit funds, and owns 3% of the UK equity market through insurance funds. Morley is particularly interested in investments that offer non-correlation with the traditional markets.

A fund of hedge funds "would be an attractive investment for our parent company" says Holtham. His team at Morley is investigating various ways of becoming involved with hedge funds, and Holtham says: "We are looking at the hedge fund market as both consumers and producers."

Holtham plans to form a team to run the new hedge fund products from a combination of the quant experts who have compiled the initial research and from the top fund managers that the group already employs. If the new products are to be run on the basis of the research already undertaken, then the research team will have a role in the new hedge funds team. Neither they nor the current Morley fund managers have any direct experience of running hedge funds.

Holtham believes the sort of product Morley is interested in launching will harness the skills that its fund managers already have. Rather than maintaining a large portfolio of stocks that is hard to keep track of, the long/short fund would consist of just the top and bottom performers in a typical portfolio. Morley's fund managers' particular areas of expertise are in UK and European equities.

The new products will probably not employ gearing hence the description "hedge-light" and will carry annual and performance fees.

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