Wierzycka could have made more judicious picks, says top hedge fund manager

Sygnia CEO Magda Wierzycka’s blistering takedown of the hedge fund industry has caused no small degree of consternation among investors in hedge funds and managers in the hedge fund industry.

In a column and interview with Business Day, Wierzycka argued that hedge funds are a “marketing con perpetuated by greed”, have failed to protect capital, abused performance fees and generally underperformed. We asked top hedge fund manager Jean Pierre Verster for his views.

I can understand that her funds might have given negative returns, because she did not pick, on average, even the average hedge fund manager. Her fault at not being good at picking hedge fund managers is not the hedge fund industry’s fault. So Sygnia could have made more judicious picks?

Yes. She jumps around between short-term performance and long-term performance, and between the SA context and the global context, and that makes it difficult to pin her down. Also remember it’s an industry where if you perform, you can do very well as a hedge fund manager. There are some very rich hedge fund managers, and because of that it’s a bit of a honey pot: it attracts people. People of above-average skill, people of average skill and people of below-average skill, they all want to take a shot at the big time and unfortunately a lot of those people enter the industry and are given capital and then blow up their funds and that also pulls down the average. I really want to get away from thinking that the average is representative of the whole industry, which is why I’ve focused on the major hedge fund players. And I am careful of “survivorship bias”. But I’ve been in the industry for 10 years and the big players of the last five to six years are 36One, Peregrine Capital, Visio, Fairtree and Laurium. They have all outperformed the all share over the long term, after fees. So it is a fact that hedge funds charge above-average fees, but even after charging above-average fees the major players have delivered above-average returns. Magda’s experience is not the experience of any investor who would have invested directly in a major SA hedge fund.

She argues that hedge funds “have abandoned their entire risk management frameworks, for example, automatic stop loss orders”. Have they?

This industry, as in any other, has responsible and irresponsible players and that is the whole point of bringing it into the regulated environment: to not allow irresponsible behaviour. So in the past one could have referred to hedge funds as cowboys, and more so globally than in SA. In SA, Kaizen closed in December after it was wrongly positioned for Cyril [Ramaphosa] winning the ANC election, but it’s not necessarily that the whole industry has bad risk management. Something like a stop loss, that’s a trading methodology: I don’t use stop losses, I pick stocks and depending on what happens I will make a judgment call on whether to hold on to the position or close it. Stop losses would not have protected you if you were long Steinhoff: you went to bed one night and Steinhoff was R50, you woke up and Steinhoff was R10. It was more long-only funds and ETFs that got caught out with Steinhoff versus quite a few hedge funds who were actually short Steinhoff. Hopefully your hedge fund manager is not a trader, they’re an investor.

So they look at the long term, the value of the company versus its price and not just the price action in isolation. Naspers on Wednesday was down 10% at one point. Does that mean we should have a stop loss and sell? No, you should go through the Tencent results and figure out what the change in value of Tencent is, and figure out what the impact of that is on Naspers and then decide if you want to hold Naspers or not.

Has fundamental stock picking, as she asserts, become irrelevant in SA markets given the massive impact that macro factors have, like the rand or Donald Trump tweeting?

It’s something I would not have expected from someone with the experience in financial markets that she has. There might be short periods where correlation between different shares increases and the shares rise and fall in tandem, but that doesn’t mean that stock picking doesn’t matter.

Over the long term what matters is valuation, and companies

and shares don’t move in tandem because they don’t operate in tandem. Every day you have such a wide dispersion of share price moves up and down, how can one say that stock picking doesn’t matter?

What about costs? That has been a criticism of hedge funds for years.

The standard management fee for most hedge funds is 1% per annum; that cannot be described as astronomical in any sense of the word. Yes, some hedge funds charge 1.5% and globally a lot of funds charge 2%, but that is changing. If a fund does very well with a performance fee structure of 20% above the cash hurdle, that could come out to a high fee and I’ll use my own fund as an example. My SA fund, the Protea equity long short fund, had a performance fee charge the last year of 5.77%. That is very high. But, after my fee, investors over the last year got, net of all fees, 19% against the all share’s 7.2%. So it is, I would say, pure envy to be upset about my 5.77% if I gave you 19%. If I don’t perform I will not get a performance fee.

It incentivises me to do as well as possible for you, the end investor, and you should not be jealous about what I get, you should be happy for what you get, especially if my fee only kicks in after I give you an above-average performance. The logical fallacy she makes is called “the Ultimatum Game” when one would prefer a worse outcome for yourself just to spite the other person. It is becoming clear that some people want investors to focus on costs rather than on performance, because they themselves do not have the ability to outperform.