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The roller coaster equity market last year provided a good test for South African hedge funds.
And judging by average or index performance the funds did well.
Of course not all hedge funds invest in equities.
There are the fixed income and multi-strategy funds.
But most hedge funds will have exposure to equities, with managers playing the double game of taking long and short positions in shares.
Last year started with the equities market still going down, followed by the strong recovery that started in March.
Bad rep
That’s the sort of market volatility hedge funds should thrive on if the manager gets stock selection right.
The biggest challenge South African hedge funds still face is investor perceptions.
The investing public – both private individuals and institutions (many retirement funds have a little exposure to hedge funds) – were starting to warm to hedge funds a few years’ back and money was increasingly flowing into the industry.
But the sub-prime and global credit crises again shook perceptions, with many offshore hedge funds invested in what are now called toxic assets.
Hedge funds in SA were mostly not part of that but shared in the bad publicity.
It’s now up to bodies such as the Association for Savings and Investment SA (Asisa) – which has assumed responsibility for the regulation of hedge funds – to also work on the negative image that still hangs around hedge funds.
Regulation
Initially, the Alternative Investment Management Association (Aima) was heading the role to regulate hedge funds in SA, hoping to draw them under the same regulations that govern the unit trust industry.
Hedge fund managers are registered: it’s the products – the individual hedge funds – that aren’t regulated.
Asisa is currently looking at regulation.
That follows the resignation of the board of the SA arm of the London-based Aima.
Those board members have now joined Asisa’s hedge fund standing committee.
Asisa CEO Leon Campher says with the majority of SA’s hedge fund operations already members of Asisa it makes sense to combine efforts with the former board members of Aima SA.
“Asisa has the expertise and resources required to help the hedge fund industry achieve its key objective of regulation at product level,” he said.
Average hedge fund returns for 2009 were pretty solid – and even better over three years.
That’s based on the Blue Ink all-SA hedge fund composite (BIC), basically an index that tracks the performance of around 100 local hedge funds.
Notable in the table is that the hedge funds recorded this performance at significantly lower volatility than equity funds.
Kevin Ewer, a portfolio manager at Blue Ink Investments, says another indication of the significantly better risk/return relationship offered by hedge funds last year is provided by the contrasting Sharpe ratio measurements of the two asset classes.
The Sharpe ratio is a measure of the excess return per unit of risk in an investment asset or a trading strategy.
It’s used to characterise how well the return of an asset compensates the investor for the risk taken.
In general, hedge funds are conservatively managed in SA. Typically, the first aim is to preserve investors’ capital, then to try and beat the return provided by cash.
The table shows hedge funds have achieved both aims over one and three years.
However, with vastly different investment mandates, strategies and benchmarks the performance returns of hedge funds will vary a lot.
That’s why they shouldn’t be judged on returns but rather on whether the manager is achieving what he aims to achieve.
Ewer says it’s over the three-year period that the out-performance of hedge funds is clearly demonstrated, both on a nominal and risk-adjusted basis.
More stable, says the table
As the table shows, over three years the BIC hedge fund performance increased by an annualised 11.2%, while the Alsi’s return was 6.5% and cash 10.1%.
Volatility for hedge funds was only 3.9%, compared with 20.9% for the Alsi.
“The figures demonstrate hedge funds not only provide a strong return over the long term but also provide more stability for investors,” Ewer said.
“The returns on the JSE were exceptionally strong in 2009, but investors endured a roller coaster ride in the early part of the year.”
Looking ahead, Ewer expects volatility to remain high this year and says hedge funds are well positioned to beat other asset classes.
“The equity market is likely to see increased volatility and it will be difficult to differentiate between quality companies and companies that have simply rallied despite underlying problems. That provides opportunities for hedge fund managers that are good stock pickers, with both the long and short portions of the fund being potential profit centres.”
Investors interested in hedge funds will want to look at fund-of-hedge funds.
They’re more affordable (individual hedge funds mostly look at minimum investments of R1m or higher) and less risky, with professionals selecting and monitoring the performance of hedge funds in the fund-of-funds.
The aggregate return of a hedge fund-of-funds should be roughly similar to the BIC numbers.
- Finweek
And judging by average or index performance the funds did well.
Of course not all hedge funds invest in equities.
There are the fixed income and multi-strategy funds.
But most hedge funds will have exposure to equities, with managers playing the double game of taking long and short positions in shares.
Last year started with the equities market still going down, followed by the strong recovery that started in March.
Bad rep
That’s the sort of market volatility hedge funds should thrive on if the manager gets stock selection right.
The biggest challenge South African hedge funds still face is investor perceptions.
The investing public – both private individuals and institutions (many retirement funds have a little exposure to hedge funds) – were starting to warm to hedge funds a few years’ back and money was increasingly flowing into the industry.
But the sub-prime and global credit crises again shook perceptions, with many offshore hedge funds invested in what are now called toxic assets.
Hedge funds in SA were mostly not part of that but shared in the bad publicity.
It’s now up to bodies such as the Association for Savings and Investment SA (Asisa) – which has assumed responsibility for the regulation of hedge funds – to also work on the negative image that still hangs around hedge funds.
Regulation
Initially, the Alternative Investment Management Association (Aima) was heading the role to regulate hedge funds in SA, hoping to draw them under the same regulations that govern the unit trust industry.
Hedge fund managers are registered: it’s the products – the individual hedge funds – that aren’t regulated.
Asisa is currently looking at regulation.
That follows the resignation of the board of the SA arm of the London-based Aima.
Those board members have now joined Asisa’s hedge fund standing committee.
Asisa CEO Leon Campher says with the majority of SA’s hedge fund operations already members of Asisa it makes sense to combine efforts with the former board members of Aima SA.
“Asisa has the expertise and resources required to help the hedge fund industry achieve its key objective of regulation at product level,” he said.
Average hedge fund returns for 2009 were pretty solid – and even better over three years.
That’s based on the Blue Ink all-SA hedge fund composite (BIC), basically an index that tracks the performance of around 100 local hedge funds.
Notable in the table is that the hedge funds recorded this performance at significantly lower volatility than equity funds.
Kevin Ewer, a portfolio manager at Blue Ink Investments, says another indication of the significantly better risk/return relationship offered by hedge funds last year is provided by the contrasting Sharpe ratio measurements of the two asset classes.
The Sharpe ratio is a measure of the excess return per unit of risk in an investment asset or a trading strategy.
It’s used to characterise how well the return of an asset compensates the investor for the risk taken.
In general, hedge funds are conservatively managed in SA. Typically, the first aim is to preserve investors’ capital, then to try and beat the return provided by cash.
The table shows hedge funds have achieved both aims over one and three years.
However, with vastly different investment mandates, strategies and benchmarks the performance returns of hedge funds will vary a lot.
That’s why they shouldn’t be judged on returns but rather on whether the manager is achieving what he aims to achieve.
Ewer says it’s over the three-year period that the out-performance of hedge funds is clearly demonstrated, both on a nominal and risk-adjusted basis.
More stable, says the table
As the table shows, over three years the BIC hedge fund performance increased by an annualised 11.2%, while the Alsi’s return was 6.5% and cash 10.1%.
Volatility for hedge funds was only 3.9%, compared with 20.9% for the Alsi.
“The figures demonstrate hedge funds not only provide a strong return over the long term but also provide more stability for investors,” Ewer said.
“The returns on the JSE were exceptionally strong in 2009, but investors endured a roller coaster ride in the early part of the year.”
Looking ahead, Ewer expects volatility to remain high this year and says hedge funds are well positioned to beat other asset classes.
“The equity market is likely to see increased volatility and it will be difficult to differentiate between quality companies and companies that have simply rallied despite underlying problems. That provides opportunities for hedge fund managers that are good stock pickers, with both the long and short portions of the fund being potential profit centres.”
Investors interested in hedge funds will want to look at fund-of-hedge funds.
They’re more affordable (individual hedge funds mostly look at minimum investments of R1m or higher) and less risky, with professionals selecting and monitoring the performance of hedge funds in the fund-of-funds.
The aggregate return of a hedge fund-of-funds should be roughly similar to the BIC numbers.
- Finweek
