Recog­nise the haz­ards

Financial Mail - Investors Monthly - - Feature: Hedge Funds -

Hedge funds have tra­di­tion­ally been re­served for a small seg­ment of SA’s in­vest­ment com­mu­nity. A min­i­mum in­vest­ment of R1m sets the bar high for the bulk of the coun­try’s fi­nan­cially savvy in­vestors, writes Jo­hann Barnard.

But now, with the in­tro­duc­tion of re­tail hedge funds that re­quire a min­i­mum in­vest­ment of R50,000 — which can be topped up with monthly debit or­der in­vest­ments — th­ese funds can ap­pear very ap­peal­ing.

A hedge fund pro­vides pro­tec­tion against mar­ket volatil­ity, as the man­agers can in­vest in more than eq­ui­ties — which is the case with unit trusts. The fund can in­vest in bonds, prop­erty, cur­ren­cies and eq­ui­ties. Fund man­agers can also draw on tools such as lever­age and short sell­ing to pro­vide pro­tec­tion against wild mar­ket swings.

Th­ese tools and strate­gies would be for­eign ter­ri­tory to the av­er­age in­vestor, who is at risk of mak­ing an ill-ad­vised de­ci­sion with­out an un­der­stand­ing of the risks in­volved. In­de­pen­dent fi­nan­cial ad­vis­ers (IFAs) also may not yet be fully qual­i­fied to make an in­formed call on whether a spe­cific hedge fund of­fers the right so­lu­tion.

“This is un­charted ter­ri­tory for the in­dus­try and in­vestors,” says Grant Mann, op­er­a­tions man­ager at 36One As­set Man­age­ment. “A lot will de­pend on the ed­u­ca­tion of the mar­ket and on in­vestors be­com­ing more com­fort­able with hedge funds over time.” Mann says th­ese funds “aim to pro­tect on the down side. They don’t guar­an­tee that there will not be losses but they are bet­ter equipped to man­age and min­imise the losses. In­vest­ing in hedge fund strate­gies can help in­vestors im­prove their risk-ad­justed re­turn pro­file … . Our hedge funds have pro­duced their best rel­a­tive re­turns in weak or neg­a­tive mar­kets.”

Mann says that 36One ex­pects most in­flows will be from fund of funds and IFAs (on be­half of re­tail in­vestors) rather than di­rectly from in­di­vid­u­als.

As th­ese in­vest­ment op­tions are still new in the mar­ket, it may be a while be­fore hedge fund man­agers set­tle on their mar­ket­ing strat­egy.

“Top of mind for many in­vestors when it comes to hedge funds is risk. It’s an area where per­cep­tion can be very dif­fer­ent from re­al­ity,” says Kim Hub­ner of Lau­rium Cap­i­tal. “Part of our job is to ed­u­cate and ex­plain the ben­e­fits and the risks.

“The new leg­is­la­tion is prob­a­bly a world first in reg­u­lat­ing the hedge fund in­dus­try, which makes SA com­pletely dif­fer­ent from other mar­kets. It will be im­por­tant for in­vestors to look for hedge funds with a long, con­sis­tent track record backed by an ex­pe­ri­enced team that has rig­or­ous in­vest­ment and op­er­a­tional pro­cesses. Flows will also de­pend on hedge funds be­ing made avail­able via linked-in­vest­ment ser­vices provider plat­forms.”

The ed­u­ca­tion process will need to deal with the fees charged by hedge fund man­agers. Th­ese are gen­er­ally con­fined to an ad­min­is­tra­tion fee and a per­for­mance fee, which can be con­tentious if not un­der­stood prop­erly.

“It is un­de­ni­able that hedge funds are more ex­pen­sive than long-only prod­ucts. To man­age a hedge fund re­quires a far dif­fer­ent skills set than for a long-only fund, and you need to be well qual­i­fied to do that.

“So a pre­mium can be charged for it,” says Hub­ner.

“It is im­por­tant to un­der­stand how per­for­mance fees are charged. Lau­rium uses se­ries ac­count­ing, which means in­vestors are not paying for past per­for­mance that they have not ben­e­fited from, as is the case with many unit trusts. And per­for­mance fees are sub­ject to a high wa­ter mark; the man­ager does not get paid for poor per­for­mance — if the man­ager loses money over a cer­tain pe­riod, he needs to get the fund above the high wa­ter mark be­fore tak­ing a per­for­mance fee.”

Mann points out that many unit trust man­agers, too, levy fees based on the fund’s per­for­mance.

Glen Baker, head of al­ter­na­tive in­vest­ments at Anchor Cap­i­tal, says crit­i­cism of fees is not en­tirely un­war­ranted, but ap­ple-for-ap­ple com­par­isons need to be made. “Man­age­ment fees, for ex­am­ple, need to be com­pared with other providers in the col­lec­tive in­vest­ment space. Ex­ces­sive fee struc­tures which may have oc­curred in the un­reg­u­lated space will be shaken out in the col­lec­tive in­vest­ment scheme world.

“Per­for­mance fees get paid only if the man­ager pro­vides a suit­able risk-ad­justed re­turn pro­file to the client.”

It will take time for th­ese hedge funds gain the in­ter­est con­ven­tional col­lec­tive in­vest­ment schemes en­joy.

They could at­tract sig­nif­i­cant in­flows when that level of com­fort is reached.

Grant Mann … ed­u­ca­tion

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.