SA hedge funds outperform equities in quarter 2 2011

The Blue Ink Composite (BIC), which tracks the performance of around 100 Hedge Funds in South Africa, reported a steady 2.11% increase for the second quarter of 2011. The BIC outperformed the JSE All Share Index (ALSI) by 2.72%, which returned -0.61% over the same period.

According to Eben Karsten, portfolio manager at Blue Ink Investments, the second quarter of 2011 was another difficult quarter for the local equity market. “Risk aversion increased sharply over the three months to June, with global growth and debt concerns in peripheral Europe leading to widespread market volatility.”

The local index ended 2.03% weaker in June following steep intra month declines of more than 6.5%, highlighting the volatility that has gripped the local equity market.

In contrast, local hedge funds were able to protect investor capital in volatile markets. Long Short Conservative and Long Short Aggressive funds returned 1.53% and 2.17% on average, while Market Neutral funds reported an increase of 1.29% over the second quarter. Fixed Income funds on average returned 3.55% performing in line with the All Bond Index which returned 3.71%.

Karsten says following ratings agency Standard & Poor's downgrade of long-term US debt from AAA to AA+ with a negative outlook, as well as Europe’s ongoing financial woes, the economic and financial outlook remains extremely complex.

This uncertainty leads to risk aversion, which in past instances have been uniformly negative to equity market performance. Indeed, volatility in local and global equity markets has continued into the third quarter of 2011.”

Karsten says that empirical evidence shows that local hedge funds have tended to outperform the ALSI during poor market conditions. “Looking back over the last three years, the worst 12 month return an investor who invested in a local hedge fund would have earned is just over 1%, compared to the -37.59% an investor could have lost if invested in the ALSI.”