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Johannesburg - Local hedge fund managers are trying to show SA investors theirs is a worthwhile asset class, despite the negative publicity it has attracted from the US and Europe.
Particularly in the US, hedge funds have either failed to deliver the protection they were supposed to offer, or investors have been prevented from making withdrawals as markets have stuttered.
While hedge funds operate under a variety of mandates, the key differentiator between hedge funds and traditional funds is that they can use leverage and benefit from going short - going up when the underlying securities fall.
In essence, you are paying a professional trader to preserve your capital and generate returns whether markets are moving up or down.
Elmien Wagenaar, head of hedge fund research at Citadel, said as an asset class hedge funds can provide diversification to investors.
"The benefit of diversification from hedge funds comes from relying on a different source for its returns compared to equities - the former extracts value from the relative pricing of individual equities, while the latter primarily relies on the current and future profits generated by companies," she said.
According to Robert Foster, chairperson of the Alternative Investment Management Association (AIMA), hedge funds have outperformed traditional equity funds during the past five years. "It was done with less risk and lower volatility, in a period of positive and negative equity market performance."
In South Africa only 1.3% of pension fund money is invested with hedge funds, compared to a global average of 18%.
Limited options for retail investors
"I think there is scope for hedge funds, but I think the bulk of them were caught out in South Africa as they were really long-only funds with some shorting," said Warren Ingram of Galileo Capital. "I prefer bond and commodity funds that are completely uncorrelated with the equity markets."
One of the key challenges facing the SA hedge fund industry is the lack of a regulatory framework, which makes it almost inaccessible to local retail investors.
Perceptions from international markets have made the issue even murkier, with European hedge funds opposed to proposed regulation that would force them to disclose many of their positions in their financial statements.
"Unlike the European experience, we already have the systems in place so that compliance with regulation requirements will not add much to our cost base nor require new expertise," said Foster.
Local hedge funds also have independent administrators and prime brokers which provides an extra layer of regulatory compliance, according to Foster.
SA retail investors have limited options available to invest in hedge funds.
The only retail type product which gives investors hedge fund-like characteristics is the Allan Gray Optimal fund, which has delivered a 12-month return of 13.58%.
Alwyn van der Merwe, a director of Sanlam Private Investments (SPI), told Fin24.com the firm believed hedge funds did serve a purpose in terms of asset allocation.
However, he recommended investments through a fund-of-hedge-fund type instrument, as offered by the likes of Blue Ink.
- Fin24.com
