Zenith Investment Partners has allocated its highly recommended rating to two hedge funds after a review of the Australian alternatives sector.
Man RMF Dynamic and Winton Global Alpha Fund both received top gongs from the research house.
"During the GFC [global financial crisis], the hedge fund industry bore the brunt of investor dissatisfaction," Zenith head of research Ben Davis said.
"Many hedge fund strategies displayed little of their hyped downside protection and when liquidity dramatically diminished there were a high number of a fund closures."
But not all alternative strategies were affected, with the commodity trading adviser (CTA) or managed futures sector delivering especially good returns, Davis said.
"Most notably, the CTA sector was a standout in terms of performance and the liquidity it provided in a period when investors wanted ready access to capital," he said.
Zenith expects CTAs, such as the Winton Global Alpha Fund, to remain good portfolio diversifiers.
Despite having given hedge fund of funds Man RMF Dynamic a highly recommended rating, the research house is rather negative on the prospects for this sector.
"Historical performance analysis of the hedge fund of fund sector has shown that many funds have failed to deliver on a post-fee basis. Even prior to the GFC, many in the sector were failing to meet objectives," Davis said.
"The liquidity and transparency risks associated with the sector clearly weren't being rewarded. A key reason many traditional hedge fund of funds have failed in the retail sector is due to their excessive fee structures.
"Investors need to pay a double layer of fees to both the multi-manager and the underlying managers held in the portfolio."
If these funds want to survive they will need to offer more fee-conscious, liquid, transparent products where the portfolio construction settings have been revised from what is considered to be the convention, Davis said.
Zenith reviewed 31 funds and gave seven recommended ratings. It did not give ratings to the remaining 22 funds.
