Johannesburg - The hype around hedge funds is cranking up as South African asset managers try to jump on the bandwagon, but investors should be wary.
Last week, journalists were treated to a presentation by Stanley Fink, who waxed lyrical about the prospects for the South African hedge fund industry. Fink - dubbed the "godfather" of the UK hedge fund industry - praised South Africa's sophisticated business environment, high standards of technology, good people and well-regulated financial system.
The arrival of Fink and his team from International Standard Asset Management (ISAM) adds to the deluge of marketing associated with hedge funds in South
Africa.
Other heavyweights who have ramped up the profile of their hedge fund businesses include Metropolitan Asset Managers, Sanlam (through Blue Ink and other Sanlam hedge fund offerings) as well as PSG Fund Management, whose CEO Ross Breedt described hedge funds as "the future" at the recent PSG annual general meeting.
South Africa's successful but low-profile hedge fund industry has to date stayed below the radar.
With limited regulatory restrictions in place in South Africa, a handful of hedge fund operators - led by JSE-listed financial services firm Peregrine - have ruled the roost for the last decade.
However, regulatory moves are afoot to make hedge funds more accessible to the investing public and allow institutional investors - like pension funds - to increase their investment in hedge funds.
Hedge funds argue that they perform better than traditional "long-only" fund managers as they can react to falling markets by buying derivatives that allow them to hedge or profit from markets.
A question mark
However, "long-only" managers counter that there is limited proof that hedge funds are better at protecting capital.
Ram Barkai, CEO of JSE-listed asset manager and hedge fund operator Cadiz, is wary - pointing out that many hedge funds have underperformed and failed to meet investor expectations.
"The hedge fund industry is a bit of a question mark at the moment - people are wondering how it is going to evolve," he told Fin24.com
Barkai said Cadiz is planning to add additional hedge funds to its offering, but would focus on developing larger funds (of R1bn) as opposed to smaller offerings of between R50m and R100m.
Piet Viljoen of asset manager RE:CM points to data from the unit trust industry research firm Morningstar, which show that hedge funds have on average been unable to beat a balanced unit trust offering over one, three or five years.
Pennies in front of a steamroller
On top of this, Viljoen is scathing of attempts by hedge funds to address regulatory issues.
"Hedge funds originated through the desire of really smart investors to invest outside of the regulated environment. In fact, that was their edge exactly - investing in the things that no one else wanted to, or were able to, invest in.
"The fact that hedge funds now want to be regulated speaks to an industry that is willing to exchange its edge for a wider base of gullible investors to sell their faulty wares to, not an industry that is acting in the best interests of its clients."
Another asset manager who spoke to Fin24.com described hedge funds as "little more than remuneration devices for the managers", and was critical of the funds' abilities to establish a clear trading strategy - particularly among the smaller offerings when markets were volatile.
"It's a bit like throwing pennies in front of a steamroller," he concluded.
- Fin24.com