Best funds with hedge fund exposure

It has thumped the FTSE All-Share with an outperformance of 11.5 per cent a year since its launch in 2007 (returning on average 12.5 per cent a year compared with 1 per cent a year on average from the FTSE All-Share) and has only been rivalled by a handful of competitor funds.

Its total expense ratio is relatively high at 1.87 per cent (plus a 20 per cent performance fee), but over a three-year period BH Macro has been a strong performer. Among the 29 other investment trusts that give exposure to this sector, its performance record has been pipped only by Third Point Offshore Investors, BlueCrest All Blue, Acencia Debt Strategies and Goldman Sachs Dynamic Opportunities - which had a sharp increase this year only because it is in liquidation. Third Point Offshore Investors' and Acencia Debt Strategies' targets are more specialised than BH Macro as they target distressed companies - making them more risky. Plus Third Point Offshore Investors uses leverage which further amplifies this risk - a step too far for most investors.

DB X-Trackers DB Hedge Fund

A safer bet than its rivals, BH Macro generates long-term returns by actively trading in and out of macroeconomic events, mainly using foreign exchange rates, G7 interest rates and bond yield curves. And it's major advantage? Unlike most other funds, its performance is typically inversely correlated to the health of the underlying financial system and equity markets, which creates a fertile environment for driving continued returns, no matter how anaemic the mainstream markets look.

Achieving this requires a set of complex financial tools that analyses countries' economies and compares them with the market to find short-term distortions. When it spots a mispricing, it invests in a position that will generate profit when the market moves back where it should be. The more volatile the market, the greater the chance of distortion, meaning turbulent periods are particularly opportunistic. Distortions in the forward rates of the US, Germany, the UK and France's jaded economies have drawn particular trading focus over recent months, with overall activity also boosted by similar scenarios in the rest of the eurozone and emerging markets.

DB X-Trackers DB Equity Strategy

Ian Plenderleith, chairman and non-executive director of the fund, is adamant BH Macro will continue to turn sovereign economies' problem areas into goldmines for investors, even if equity markets do pick up.

He's also quick to point out the trust's directors have put their money where their mouths are, with heavy investment in it themselves - giving them a vested interest in its sustained success - and an extra safety net for BH Macro investors.

Because it's invested purely in a hedge fund, you can only access limited information about the ins and outs of where your money is going. The company is aware investors find this unsettling, so it releases free monthly shareholder reports detailing a view of the market and fund performance.

If there's ever been a time to invest in BH Macro - it's now, according to Alan Brierley, director of investment companies at Canaccord Genuity. He warns against an equity-heavy portfolio in the current climate and recommends every investor should include BH Macro in their portfolio.

JP Morgan

Alternatives

Some open-ended funds have also thrived in recent years. Top performers include Henderson Credit Alpha I Gross, Absolute Insight Emerging Market Debt and Newton Real Return. Of these, we like Newton Real Return which has earned a place in Investors Chronicle's Top 100 Funds. It delivered positive returns even during the financial crisis in 2008.

Another popular choice among independent financial advisers is Standard Life's Global Absolute Return Strategies (GARS) fund, which invests using a range of underlying strategies and has a large team standing behind it. It's the third-best performer in its sector over a one-year period and has a lower risk-rating than its counterparts, but it's a relatively immature fund so there's no solid proof it can weather the markets at their most hostile.