SA hedge fund industry

by Christine Naidu, Manager Research Analyst
November 2017

Why hedge funds?

  • Low correlation to traditional assets
  • Access to different investment strategies, providing more flexibility for fund mandates

How to invest

Two kinds of vehicles are available to SA investors:

 



  • Funds in SA


  • Accessibility


  • Minimum investment Amount


  • Investor Liquidity

Qualified Investor Hedge Funds (QIHF)

  • Approximately two thirds of hedge funds in SA
  • Qualified investors that are knowledgeable and have experience in financial and business matters or have appointed a financial advisor who is qualified to advise on the risks and merits of investing in a hedge fun
  • R1million
  • Calendar month

Retail Investor Hedge Funds (RIHF)

  • Approximately one third of hedge funds in SA
  • Available to all investors

    Typically a unit trust
  • Varies per fund minimum investment option
  • Daily

Insider views: An interview Garreth Montano, Director at Corion Hedge Fund of Funds Manager

We breakdown the assessment of hedge fund managers into both a qualitative and quantitative analysis.

Qualitative:

We essentially focus two key factors: the management team and their investment thesis. We look at the qualifications and experience of the investment professionals and we drill down into their investment propositions and importantly the sustainability of the proposition during different market cycles.

An important element for us is alignment of interest between us as potential investors and key individuals managing the funds. We like to see investment managers with their own capital invested. Outside of having their own capital at risk, we believe that appropriate performance fees incentivise managers to deliver on their investment thesis.

Quantitative:

Independent of the qualitative process, a pure quantitative assessment of return history is conducted. This is an important link and check between qualitative and quantitative assessment. Conducting these assessments independently makes it a lot more difficult for a manager to mislead or misrepresent their offering, or for our manager research team to allow behaviour biases to impact their analysis.

We explore all aspects of returns through our extensive hedge fund data base. It is critical for us to understand the risk associated with a strategy and not just return prospects.

Arguably the most important lesson that we have learnt is that different investment approaches thrive in certain environments and face headwinds in others.  At Corion we focus on a longer-term cycle and aim to guard against placing too much emphasis on managers ability to deliver strong performance over the short term. Alpha or outperformance infrequently comes in isolation. Managers have biases and often rely on extracting similar market premiums or drivers of returns (e.g. beta or market returns, volatility, liquidity and credit amongst others). Understanding how these factors contribute to performance is important when assessing a fund manager.

Another important lesson learnt is that businesses can change over time along with the original investment thesis. When defining events such as rapid asset growth or a change in the roles of key investment professions occurs, it is important to immediately reassess our view on an underlying manger.

Probably the main attribute that investors and fund managers seek from a hedge fund is uncorrelated returns to traditional asset classes. Given the broad array of investment tools available to hedge fund managers as well as less constrained mandates than the more traditional long only industry, hedge fund managers are able to express the investment view in a more dynamic manner. This is of particular importance when markets are falling or there are short-term market dislocations. Managers are able to hedge positions and may even profit from negative market returns in traditional asset classes.

The recently launched STANLIB Multi-Manager Multi-Strategy Hedge Fund captures these attributes. It has low sensitivity to the direction of capital markets and aims to deliver returns in varying market cycles and conditions.

The term “hedge fund” encompasses a wide variety of investment strategies, ranging from low risk to high risk. Hedge funds invest in traditional underlying asset classes such as equities and bonds, may employ gearing and have the ability to short the market.

Given there are low and high risk strategies available, it is critical for investors and advisers to understand the risk associated with each fund. Relevant information can be obtained from the fund’s minimum disclosure document (fact sheet). Some of the key elements to look out for are:

  • Level of gearing (net and gross)
  • Volatility of returns
  • Largest drawdowns
  • Concentration and size of largest position