What are some examples of "sophisticated assets", like SIDs and such? ?

Question

How do they originate? where do you find the market, or list of these sophisticated assets?

Answer 1

Two important examples are "private equity" and "hedge funds".

Private equity

Unbeknown to many, there is a way for the everyday investor to get a piece of the action – via private equity investment trusts (PEITS).

Most PEITs invest directly in unquoted companies, but some PEITs are funds-of-funds with a portfolio of other investment trusts and private equity funds. There are geographical variations, with PEITs investing in the UK, Europe, the US and globally. Some also have industry-sector specialities. They cover a range of strategies, but management buyouts are dominant. Private equity is the best performing trust sector over the 10 years to the end of 2005, up on average by 338 per cent.

By their very nature, PEITs are cyclical, slow-burning investment vehicles and, because they have generated substantial returns, particularly over the past three years, such performance may not be repeated in the short term. Several trusts that have exited deals in recent months are sitting on significant amounts of cash - high cash levels tend to dilute returns because that money will generate modest gains.

Hedge funds

The whole point of most hedge funds is to protect wealth rather than to make big bets with people's money – to hedge, as the name suggests.

To do so, they employ strategies different from those of run-of-the-mill unit trusts, such as borrowing to make the most of favourable investment conditions. Hedge funds can also "short" shares – that is, make a bet that the share will fall rather than rise.

Funds of funds are by far the best route for private investors as they typically invest in a dozen or more hedge funds and are structured to reduce risk. Single hedge funds should be avoided by all but the wealthy and sophisticated investor because they can be extremely risky. In a diversified portfolio of funds, if one fund goes belly-up, the whole investment will not come crashing down.

Hedge funds are no longer just the preserve of the seriously rich. Close Fund Management and New Star, for instance, have just launched hedge funds accepting investments of £37,500.