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Unit trust inflows continue to show the same depressing story. Local money market funds attract a large amount of money – R3,94bn in May (April showed an outflow, technical really caused by one fund exiting). Much of that may be institutional money being parked for the short term. But it’s known there are also many individual investors who continue to “save” their money in money market funds.
Scared of equities and also the more limited risk of fixed-income unit trust funds such investors plough their money into money market funds. At this stage is has to be asked where the real risk lies. The money market investor might be ensured his capital will remain safe: but what’s the use of capital if it’s not growing at least as fast as inflation? Currently, inflation is around 6% up. Is a money market fund investor getting anywhere near that after tax?
The alternative is fixed-income unit trust funds – and here performance varies widely according to the stated benchmark. It’s a viable alternative for conservative investors but they still seem nervous.
So mentioning hedge funds will probably send their nervous systems into tilt. False perceptions are the curse of the hedge fund industry. Yet South African fixed-interest hedge funds (summarised on the table below into four respective hedge fund of funds: HFoF), are conservatively managed, offer limited risk and provide far better returns.
Apart from the hedge fund name, investors are also nervous because HFoFs aren’t regulated. Many hedge fund managers (but certainly not all) would like to be regulated. For some time now it’s been suggested hedge funds could fall under the Collective Investment Schemes Control Act, just as unit trust funds do. But the Financial Services Board continues to sit on its hands, or has perhaps just forgotten about hedge funds. If there’s a potential problem the best thing to do is forget about it, hey chaps?
What the table doesn’t show (Finweek shortened the more detailed RisCura tables) is risk. For the two HFoFs that have been around for more than three years, downside risk is 2,02% for the Alpha product and 2,36% for Iconic. For that very limited risk investors are getting returns comfortably above 10%/year.
But capital can be at risk over the short term. For the year-to-date (up to May) the Blue Ink HFoFs was under water by 1,32%. However, for the full year (as shown on the table) it’s the top performing fund.
Unlike fixed interest unit trust funds, fixed interest hedge funds have the full hedge fund toolbox available to them. They might leverage bonds and use fixed income derivatives. That probably adds to investor caution. It shouldn’t. Used responsibly, the hedges make the funds lower risk. But investors need to realise that, like all investment products, a reasonably medium- to long-term view should be adopted. The fixed income hedge funds target not to lose capital over an average three-year period.
If only those nervous savers would take a closer, more open-minded look at hedge funds. But they probably won’t and will continue sticking cash into money market funds, believing it’s a risk-free investment. Risk-free? Money market fund investors have already suffered the opportunity cost of equity returns in the market. Now they face the risk of being unable to keep up with inflation.
Scared of equities and also the more limited risk of fixed-income unit trust funds such investors plough their money into money market funds. At this stage is has to be asked where the real risk lies. The money market investor might be ensured his capital will remain safe: but what’s the use of capital if it’s not growing at least as fast as inflation? Currently, inflation is around 6% up. Is a money market fund investor getting anywhere near that after tax?
The alternative is fixed-income unit trust funds – and here performance varies widely according to the stated benchmark. It’s a viable alternative for conservative investors but they still seem nervous.
So mentioning hedge funds will probably send their nervous systems into tilt. False perceptions are the curse of the hedge fund industry. Yet South African fixed-interest hedge funds (summarised on the table below into four respective hedge fund of funds: HFoF), are conservatively managed, offer limited risk and provide far better returns.
Apart from the hedge fund name, investors are also nervous because HFoFs aren’t regulated. Many hedge fund managers (but certainly not all) would like to be regulated. For some time now it’s been suggested hedge funds could fall under the Collective Investment Schemes Control Act, just as unit trust funds do. But the Financial Services Board continues to sit on its hands, or has perhaps just forgotten about hedge funds. If there’s a potential problem the best thing to do is forget about it, hey chaps?
What the table doesn’t show (Finweek shortened the more detailed RisCura tables) is risk. For the two HFoFs that have been around for more than three years, downside risk is 2,02% for the Alpha product and 2,36% for Iconic. For that very limited risk investors are getting returns comfortably above 10%/year.
But capital can be at risk over the short term. For the year-to-date (up to May) the Blue Ink HFoFs was under water by 1,32%. However, for the full year (as shown on the table) it’s the top performing fund.
Unlike fixed interest unit trust funds, fixed interest hedge funds have the full hedge fund toolbox available to them. They might leverage bonds and use fixed income derivatives. That probably adds to investor caution. It shouldn’t. Used responsibly, the hedges make the funds lower risk. But investors need to realise that, like all investment products, a reasonably medium- to long-term view should be adopted. The fixed income hedge funds target not to lose capital over an average three-year period.
If only those nervous savers would take a closer, more open-minded look at hedge funds. But they probably won’t and will continue sticking cash into money market funds, believing it’s a risk-free investment. Risk-free? Money market fund investors have already suffered the opportunity cost of equity returns in the market. Now they face the risk of being unable to keep up with inflation.
