InvestSA (April 2014 Issue)
Are hedge fund managers really high-rolling risk-takers who drive fast cars and take expensive holidays, cynically earning high performance fees off investor capital when the going is good before giving back their diminished assets when things go awry?
It is a misconception that may have been true of some managers, some of the time, in certain parts of the world. But it is an outdated generalisation still bandied about in post-2008 TV shows and popular novels that reflects little of the actuality in today’s world.
The global hedge fund industry has achieved new respectability and accountability in the years since the 2008 crash – with big institutional investors allocating increasing amounts of capital to strategies designed to protect capital and offer uncorrelated returns in an uncertain world.
The hedge fund industry in South Africa comprises some of the best investment talent around, often individuals that have made their names in big institutions before venturing on their own to start niche, boutique alternative asset management companies. Some of these managers have been around for many years, and have long, proven track records – the Laurium Capital founders, for example, earned their stripes in leading roles at Deutsche Bank before setting up on their own in 2008.
South African hedge funds are a small (R40bn) relative to the size of local collective investment schemes (over R1.4 trillion as at end December 2013) but are an important part of the investment landscape.
As a group, they have returned a median annualised 10.94% net of all fees in the seven years between January 2007 and December 2013, according to HedgeNews Africa, which tracks monthly numbers from South African managers, vs the FTSE/JSE All Share Index annualized return of 9.23% over the same period (total return 12.4%).
That includes a median return of 9.03% in the crash year of 2008, according to the HedgeNews Africa South African Single-Manager Composite, when the JSE All Share Index fell by 23.23% on a total return basis. The Composite went on to gain 12.32% in 2009, as the South African market bounced 32%.
The data clearly reflects that, as a group, hedge funds are doing what they are designed to do – protecting capital in bear markets, while capturing some of the upside in bull markets. The year 2008 is a convincing argument for including such alternative strategies in broader investor portfolios, while 2009 shows that hedge funds are, in general, not created to keep pace with raging markets. Downside protection comes at a cost, and over time hedge funds have proved their ability to offer superior risk-adjusted returns.
The broader median numbers also don’t account for those individual managers that consistently outperform their peers and the broader indices. The recent HedgeNews Africa awards, based on risk-adjusted returns for calendar year 2013, highlighted a group of managers doing just that. Single-manager fund management companies Capricorn Fund Managers, Kaizan Asset Management and Laurium Capital garnered double awards for their 2013 performances.
In South Africa, the equity long/short funds dominate the industry, with more than 50% of assets in this category. The second largest strategy is fixed income hedge (15.7% of industry assets), followed by multi-strategy (9.0% of industry assets). Market neutral strategies make up 14.6% of industry assets. Volatility arbitrage, structured finance funds, and other strategy funds make up the remainder. (Source: South African Hedge Fund Survey 2013, Novare Investments)
It is interesting to note that the Long Short Index outperformed the average of all CISCA registered multi-asset funds over the last 3 years (to end Jan 2014), with lower volatility than the Multi-Asset Medium Equity, Multi-Asset High Equity and Multi-Asset Flexible categories, and with only slightly higher risk than the Multi-Asset Low Equity category. (Source: Symmetry Survey September 2013; ProfileData and FE)
Risk Return: Long Short Index vs. Asset Allocation Funds (3yrs to end January 2014)
Hedge funds in South Africa are also highly regulated, something that until recently has been lacking in the global industry. In recent years, good performance numbers have put top domestic hedge fund managers on the radar of global investors searching for yield. In turn, managers have improved transparency, beefed up operationally, responded to investor concerns on fees, and added to their investment teams to meet the stringent due diligence requirements of big investors, who have become that much more critical in a post-2008 world.
The result is a stronger and more robust hedge fund industry that certainly does deserve the attention of investors looking to build diversified portfolios that stand the test of time.