In volatile times, when investors are not achieving returns out of traditional asset classes, hedge funds can be a great diversifier. While there has been a wide dispersion of returns in individual hedge funds, many performed extremely well in 2019. The new ASISA Hedge Fund Classification Standard comes into effect on 1 January 2020, with the aim of classifying all hedge fund portfolios, including hedge fund offund portfolios, into different categories. The aim is to make it easier for investors to assess and compare funds and to select hedge funds appropriate for their risk profiles and investment portfolios.
To label all hedge funds (and hedge fund managers) as high risk is misleading. The risk profile of a particular hedge fund depends on the mandate of that fund. Some mandates may be very aggressive, using leveraged positions, while others may be designed to focus on hedging and delivering low volatility returns. There are hedge fund mandates to accommodate a range of risk appetites.
Hedge funds are obviously not without risk, as history internationally has shown. Fortunately, hedge fund managers in SA have proven themselves to be more conservative than their international counterparts – there are some experienced managers that have long, consistent track records to prove it.
Furthermore, hedge funds are now much more transparent and highly regulated by the FSCA
At least 15-20% of an investor’s portfolio should be invested in assets that are non-correlated to traditional investments, which makes hedgefunds a key part of any well-diversified portfolio.
Regulation 28 allows for a 10% total allocation to hedge funds (2.5% per fund). However, CISCA, the legislation that governs CIS funds (unit trusts) does not currently allow investments in hedge funds, even though they are now regulated by the FSCA under CISCA. We believe this should be amended as soon as possible to align with Regulation 28.
There is a misconception that hedge funds are risky investments, when in fact SA hedge fund managers are relatively conservative, constraining downside performance and reducing volatility. We suspect this may also be due to the funds not being available to retail investors via LISPs, which are the primary channels used by financial advisers, and due to the fact that advisers and investors alike do not have a good enough understanding of their benefits to be able to invest with confidence. We believe that the introduction of daily priced, daily traded investment options on RIF hedge funds like the Laurium Long Short Fund and Laurium Market Neutral Fund will open new investment opportunities to allocators.