There’s a good reason why advisors are looking for alternative investment options to grow and protect clients’ wealth. During volatile market periods, which we have become so accustomed to, it can be hard for investors to stay the course and not have a knee-jerk reaction when markets are going against them.
Over the past decade and a half during times of market stress (e.g. the Global Financial Crisis, the Covid Pandemic and, more recently, global inflation concerns), hedge funds in South Africa have been able to protect capital well on the downside while still providing equity-like returns on the upside, exactly what is needed for post-retirement savings that are not constrained by Regulation 28, and specifically for those invested in Living Annuities.
“Over the past decade and a half during times of market stress, hedge funds in South Africa have been able to protect capital”
South African hedge fund managers operate in a less efficient market than most other global markets and the market is dominated by big traditional long-only funds. Hedge fund managers can combine substantial research capabilities, employ a flexible mandate and other strategies like leverage and shorting (selling a stock if you think the price is going down) to generate superior risk adjusted returns. Equity long/short is the most used hedge fund strategy in South Africa that looks to generate alpha from stocks rising and falling.
These returns are augmented by special situations, pair trades, book-builds, and corporate actions.
The mandate or risk parameters of the fund in terms of leverage and net exposure will largely determine the risk profile of the fund. While managers may use leverage and shorting to amplify returns, we use short opportunities to reduce volatility. Risk can be reduced through having a lower beta and net exposure to the market, and having a higher upside capture than downside capture consistently over time.