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A properly diversified portfolio needs some exposure to hedge funds. It should be an obvious choice for investors and financial advisers seeking downside protection and a contra-cyclical investment.
But it’s not because there remains a big perception problem relating to hedge funds. It’s the old story of a few spectacular hedge fund collapses giving the rest of the industry a bad name.
However, there also seems reluctance on the part of South African investors and advisers to take a closer look at hedge funds and what that investment class has achieved. Despite that, the growth of SA’s hedge fund industry has been quite impressive.
The first funds were launched in 1999 and by 2002 the 10 hedge funds up and running had around R2bn in assets under management, says Ian Hamilton, chairman of Investment Data Services.
By year-end 2009 assets under management had grown to an estimated R35bn, run by more than 140 single strategy funds.
Performance has also been impressive, though that goes largely unnoticed. It’s probably because hedge funds in SA are generally conservatively run, with capital protection usually the first aim.
That means when the all-share index runs – typically because resources stocks are doing well – hedge funds can’t keep pace.
But when the equities market turns down hedge funds come to the fore – as in 2008, when the all-share lost around 30%.
During that period most hedge funds provided positive returns.
Longer-term performance from hedge funds also tends to be better than equity funds. Using the Blue Ink All South African Hedge Fund Composite (BIC), which tracks more than 100 local hedge funds, average returns for the three years to March 2010 were 31.3%.
Over the same period the all-share showed a return of 14,4%.
But as important as the higher returns, probably even more important is hedge funds achieved that at far lower volatility than equities.
The BIC also tracks volatility and shows the average 31.3% generated by hedge funds was at a volatility measurement of 3.58%.
By comparison, the 14.4% from the all-share over the same period came at a volatility measurement of 21.21%.
Protection against volatility is one good reason why investors should be looking at hedge funds.
The vast majority of those aren‘t about top performance: the managers don’t try to shoot out the lights.
If an investor wants top performance a pure equity fund is probably a better option. But then the investor must accept returns will be cyclical and at times negative, sometimes for long periods.
Hedge funds try and reduce the effects of the cycle by limiting the downside.
Top performance isn’t on the agenda: many hedge funds set a conservative benchmark of beating cash plus one or two percentage points (which they couldn’t do, on average, over the three years to March 2010, when the return from cash was 33%, showing what a roller coaster ride the JSE took investors on).
By limiting the downside through various techniques unavailable to equity funds, hedge funds probably offer a better risk/return profile.
That’s the value that Kevin Ewer, a portfolio manager at Blue Ink Investments, sees in hedge funds.
“It’s impossible to know when a bull market will turn bearish, which is why it’s so important to always maintain exposure to asset classes – such as hedge funds – that offer a degree of protection in periods of market turbulence.”
Yet for many investors the perception remains hedge funds are a high-risk investment. Part of that is no doubt related to hedge funds not being regulated under the Financial Services Board (FSB), like unit trust funds are.
Hamilton says while there’s no regulatory framework for hedge funds (something many hedge fund managers would like to have), it’s not strictly correct that hedge funds don’t operate in a regulated environment.
“Investment managers are required – under the FAIS Act – to seek approval and registration from the FSB for them to operate as hedge fund investment managers.”
He adds many of the businesses associated with hedge funds – including prime brokers, custodians, third party fund administrators and companies offering third party risk analysis – are regulated.
Possible regulation of hedge funds is an ongoing issue. Many retirement funds would welcome it, allowing a greater investment in hedge funds.
Private investors interested in hedge funds should look at fund-of-hedge-funds, of which a number are available on the local market.
While many of the well-know asset managers – and hedge funds specialists, such as Peregrine – run one or more single manager hedge funds, initial investment will be high (probably no less than R1m). Fund-of-hedge-funds avoid key man risk and offer diversification between different funds using different strategies. And there’s an expert selecting the hedge funds.
- Finweek
But it’s not because there remains a big perception problem relating to hedge funds. It’s the old story of a few spectacular hedge fund collapses giving the rest of the industry a bad name.
However, there also seems reluctance on the part of South African investors and advisers to take a closer look at hedge funds and what that investment class has achieved. Despite that, the growth of SA’s hedge fund industry has been quite impressive.
The first funds were launched in 1999 and by 2002 the 10 hedge funds up and running had around R2bn in assets under management, says Ian Hamilton, chairman of Investment Data Services.
By year-end 2009 assets under management had grown to an estimated R35bn, run by more than 140 single strategy funds.
Performance has also been impressive, though that goes largely unnoticed. It’s probably because hedge funds in SA are generally conservatively run, with capital protection usually the first aim.
That means when the all-share index runs – typically because resources stocks are doing well – hedge funds can’t keep pace.
But when the equities market turns down hedge funds come to the fore – as in 2008, when the all-share lost around 30%.
During that period most hedge funds provided positive returns.
Longer-term performance from hedge funds also tends to be better than equity funds. Using the Blue Ink All South African Hedge Fund Composite (BIC), which tracks more than 100 local hedge funds, average returns for the three years to March 2010 were 31.3%.
Over the same period the all-share showed a return of 14,4%.
But as important as the higher returns, probably even more important is hedge funds achieved that at far lower volatility than equities.
The BIC also tracks volatility and shows the average 31.3% generated by hedge funds was at a volatility measurement of 3.58%.
By comparison, the 14.4% from the all-share over the same period came at a volatility measurement of 21.21%.
Protection against volatility is one good reason why investors should be looking at hedge funds.
The vast majority of those aren‘t about top performance: the managers don’t try to shoot out the lights.
If an investor wants top performance a pure equity fund is probably a better option. But then the investor must accept returns will be cyclical and at times negative, sometimes for long periods.
Hedge funds try and reduce the effects of the cycle by limiting the downside.
Top performance isn’t on the agenda: many hedge funds set a conservative benchmark of beating cash plus one or two percentage points (which they couldn’t do, on average, over the three years to March 2010, when the return from cash was 33%, showing what a roller coaster ride the JSE took investors on).
By limiting the downside through various techniques unavailable to equity funds, hedge funds probably offer a better risk/return profile.
That’s the value that Kevin Ewer, a portfolio manager at Blue Ink Investments, sees in hedge funds.
“It’s impossible to know when a bull market will turn bearish, which is why it’s so important to always maintain exposure to asset classes – such as hedge funds – that offer a degree of protection in periods of market turbulence.”
Yet for many investors the perception remains hedge funds are a high-risk investment. Part of that is no doubt related to hedge funds not being regulated under the Financial Services Board (FSB), like unit trust funds are.
Hamilton says while there’s no regulatory framework for hedge funds (something many hedge fund managers would like to have), it’s not strictly correct that hedge funds don’t operate in a regulated environment.
“Investment managers are required – under the FAIS Act – to seek approval and registration from the FSB for them to operate as hedge fund investment managers.”
He adds many of the businesses associated with hedge funds – including prime brokers, custodians, third party fund administrators and companies offering third party risk analysis – are regulated.
Possible regulation of hedge funds is an ongoing issue. Many retirement funds would welcome it, allowing a greater investment in hedge funds.
Private investors interested in hedge funds should look at fund-of-hedge-funds, of which a number are available on the local market.
While many of the well-know asset managers – and hedge funds specialists, such as Peregrine – run one or more single manager hedge funds, initial investment will be high (probably no less than R1m). Fund-of-hedge-funds avoid key man risk and offer diversification between different funds using different strategies. And there’s an expert selecting the hedge funds.
- Finweek
