Investment: Hedge Funds - Opportunities Unlimited
The annual hedge fund conference that took place in Cape Town recently was a coming together of consultants, trustees, managers and third party providers to discuss the way forward for all involved in the industry. Some big local and offshore names were present and the feedback from foreign participants, on the whole, was very pleasing. Emerging markets such as Brazil, India and China are viewed as new high potential markets for offshore hedge fund managers. South Africa itself was seen as a potential investment arena, with the offshore institutions viewing our manager transparency, skills set and performance returns in a good light. Our administration and prime broking abilities were also highly complimented.
In general it has been a mixed performance year for local hedge funds. For October 2006 year-to-date (YTD), the Nedgroup hedge fund index returned 15%. Breaking this index into its constituent parts, the following emerges: The fixed income index has returned a rather subdued 5% YTD, but this strategys diversification benefit is unparalleled. The long/short index has returned just over 20%, with the market neutral index just under 10% - this in a pretty challenging bull market where locating a sustainable short position is a task in itself! The trading index has returned just below 20% YTD, with the highest of the hedge fund index volatility levels, however, only equal to that of the bond market.
The JSE itself returned 30% YTD, but with volatility levels at least twice those of the hedge fund indices - good performance, all in all, if you owned the market or the sector.
One of the threats facing the local hedge fund industry is the lack of breadth in strategies, but recent developments in the private equity space could make for interesting opportunities. To see how private equity is providing opportunities to hedge funds, we need to look abroad.
Recently, through the emergence of Private Investment in Public Equity (PIPE), hedge funds have been buying out chunks of small to medium companies. Typically, these shares are offered at a discount, usually between 5% and 20%, with agreements that they cannot be sold for two months or more. Often these deals lead smaller companies out of bankrupt positions while hedge fund managers receive the shares at bargain prices, often buying these outright. It is not uncommon for hedge funds to invest in some 40 to 50 PIPEs a year. (Source: Los Angeles Business Journal: 20 June 2005)
Chicago-based Citadel Investment Group LLC is planning to sell US$ 2 billion in debt to investors in one of the hedge fund industrys biggest private placement deals ever. Citadel is in the process of promoting this private placement to complement its 20% YTD performance. (Source: Chicago Tribune: 29 November 2006)
In the UK, talk has surfaced of Caffe Nero' (a coffee chain of 262 stores with a market cap of 2,3 billion pounds sterling) intention to go private. GLG partners, a large hedge fund company, holds 2% of the group and is believed to be one of many hedge funds with a substantial stake in the business. This potential sale could have a ripple effect on the hedge fund managers' performance returns. (Source: The Independent: 30 November 2006)
Even Canada has seen private equity and hedge fund activity, with retail businesses moving out of public hands into those of large private equity-based institutions, most of these being US-based. The economics of such deals often offer hedge funds significant opportunities. Change-of-control transactions are usually successful only if they afford the seller a large premium. The need in this type of transaction for minority approval gives hedge funds considerable leverage to increase premium and thus create opportunities for large gains. (Source: Globaland Mail: 29 November 2006)
South Africa has recently seen the conclusion of a large private equity deal where the Victoria and Alfred Waterfront was bought out by a consortium of local and offshore private equity players and businesses. Other activity in the local markets by private equity firms has also surfaced, with the retail sector experiencing strong interest from foreign and local private equity players. Successfully concluded, these deals would run into billions of rands. Through these developments hedge funds may be presented with trading opportunities that are not available in our markets at the moment. These opportunities could lead to the formation of a new breed of hedge fund manager, as well as the formation of new hedge fund strategies.
Stephen Brierley, Portfolio Manager, Worldwide Capital
