Retail hedge funds mitigate risk
• “Hedge funds give the overall portfolio better protection during a downturn in the markets”. • “Retail hedge funds a strong role to play in creating savings for SA”. • “Hedge fund strategies work in all market conditions”.
With the advent of retail hedge funds in South Africa, Momentum Investments hosted a panel discussion on the newcomers at its Investment Summit in Cape Town on 12 November. The panel was chaired by Alec Hogg, Editor and Publisher of Biznews.com.
The panel consisted of Bradley Anthony, Chief Investment Officer of Fairtree Capital, Cy Jacobs, Director at 36ONE Asset Management and Rob Oellerman, Founding Member of Tantalum Capital.
Anthony gave a brief overview of SA’s hedge fund industry based on statistics from the 2015 Novare Hedge Fund Survey.
The hedge fund industry currently has R62bn in assets under management and grows about 10% annually. SA has over 50 hedge fund managers and about 100 unique hedge fund mandates. Fund of Hedge Funds attract about 57% of all inflows followed by high-net-worth individuals at 26%, with about 17% coming from pension and other funds.
Anthony explained that not all hedge fund strategies are available in South Africa due to the limited size and depth of liquidity of the Johannesburg Stock Exchange.
According to Anthony, when hedge funds are blended into an equity-only portfolio or a balanced fund, risk-adjusted returns improve and volatility is reduced. His statistics show that adding hedge funds gives the overall portfolio better protection during a downturn in the markets, while still participating in any market upside.
Oellerman welcomed the new retail hedge funds. He said that up until now, hedge funds had operated in an unregulated space, where the managers were regulated and had a hedge fund licence but the products were not.
The new regulation is being formulated by Treasury and overseen by the Financial Services Board (FSB). The legislation allows existing hedge fund strategies to be replicated as retail investment funds and qualified investment funds, with minimum lump sum investments of R50 000 and R1m respectively.
Oellerman believes that retail hedge funds have the tools to tackle both known and unknown returns and have a strong role to play in an overall portfolio and in creating savings for SA.
Jacobs said hedge fund strategies work in all market conditions. As they protect against downside risk, they can reduce the risk exposure of a long-only portfolio, while adding profitability at half the volatility of the market.
Anthony pointed out that there is sufficient capacity in the hedge fund space for large-scale adoption by retail investors. Although the local market lacks depth and liquidity, there is still potential to double the equity capacity and extend to other markets like the bond market. Theoretically, hedge fund managers could run out of road, but this will not necessarily be the case as retail hedge funds are still unpopular.
On the question of how much of a discretionary fund to allocate to hedge funds, Jacobs says he would invest 100%.
Oellerman says hedge funds offer a wide spectrum of opportunities for risk and risk management. The size of the investment depends on the mandate and caliber of the manager. One way is to allocate to a multi-strategy fund with a portfolio of satellite specialist hedge strategies of about 10-16% of the fund, based on a life-stage model.
Anthony agrees with Jacobs that he would invest most of his portfolio in hedge funds. However, he concedes that the percentage allocated to hedge fund exposure depends on the individual’s risk appetite. Various strategies are available and they must blend in and make sense with the rest of the portfolio.
Currently there appears to be a flow away from active to passively managed funds or smart beta funds. Anthony says hedge funds are an ideal addition as an uptick to a passive fund returns.
