The short an­swer

Lat­est in­ci­dents raise ques­tions about how hedge funds are run and the role they play, writes Jo­hann Barnard

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

Hedge funds, and the ben­e­fits they can de­rive when short­ing a stock, hit the head­lines again in the past year.

Many in­vestors feel hard done by con­cern­ing two in­ci­dents in par­tic­u­lar: re­search out­fit Viceroy claimed mis­deeds at Stein­hoff and mis­state­ment of de­faults at Capitec.

The Stein­hoff re­port was prob­a­bly less de­ci­sive in the com­pany’s share price col­laps­ing as Markus Jooste had al­ready re­signed, point­ing to a se­ri­ous cri­sis. The Capitec re­port, how­ever, is still vig­or­ously dis­puted by the lender and has come un­der crit­i­cism for ap­par­ent op­por­tunis­tic mo­tives.

Even though Viceroy it­self is not a hedge fund, it is be­lieved to be work­ing with funds that had been short on th­ese stocks.

The com­mo­tion has done lit­tle to fos­ter pos­i­tive sen­ti­ment to­ward hedge funds, es­pe­cially their most po­tent weapon: short­ing.

This is­sue was also the topic of a heated ex­change be­tween hedge fund man­ager 36One As­set Man­age­ment and man­age­ment of Re­silient Prop­erty Group. The com­pany’s shares have suf­fered this year af­ter a re­port by the fund man­ager was leaked that claimed ma­nip­u­la­tion by com­pany man­age­ment of val­u­a­tions.

In­ves­ti­ga­tions and me­dia re­ports since have con­firmed the va­lid­ity of th­ese sus­pi­cions, while the prop­erty group has main­tained that the re­port was pro­duced be­cause 36One had a short po­si­tion on its stock.

36One co-founder Cy Ja­cobs has con­firmed the short po­si­tion, but re­jected claims that the re­port was a Viceroystyle tac­tic to lower the price.

The de­tails of this case apart, th­ese lat­est in­ci­dents do raise ques­tions about how hedge funds are run and the role they play. Ja­cobs says th­ese in­ci­dents have in­tro­duced greater un­cer­tainty about the ve­rac­ity of cor­po­rate re­port­ing.

“What has changed is that peo­ple are more wary, and un­for­tu­nately it has brought the whole mar­ket down a bit. It could also be be­cause SA is no longer viewed as the pre­mium des­ti­na­tion for cor­po­rate gov­er­nance and ac­count­ing stan­dards.”

This cre­ates an op­por­tu­nity, he sug­gests, to fix th­ese fail­ings and set the in­vest­ment in­dus­try on a new path.

“We’re in a dif­fer­ent era,” he says. “So, post-Stein­hoff and post-Zuma, we’re in a clean-up phase and there’s go­ing to be a lot more scep­ti­cism about what man­age­ment tells peo­ple. And

peo­ple will be wary of any com­plex struc­tures, such as those they had in the Stein­hoff group.

“And you can see it al­ready. There are a lot more ques­tions be­ing asked of listed com­pa­nies than there was in the past.”

Though there is lit­tle real fear that th­ese in­ci­dents might taint lo­cal hedge funds’ rep­u­ta­tion, there is al­ways the pos­si­bil­ity of con­ta­gion if the is­sues and mech­a­nisms are not clearly un­der­stood.

No­vare In­vest­ments’ Neil Ver­ster says bring­ing hedge funds into the re­tail space will help to grow that un­der­stand­ing among in­vestors.

“There’s still a need for ed­u­ca­tion in this space, to al­ter the mis­con­cep­tions many in­vestors have about hedge funds,” he says. “In our view, the Viceroy in­ci­dent was not a neg­a­tive for hedge funds. Though some man­agers were on the wrong side of the re­lated trades, it high­lights the value of be­ing able to short se­cu­ri­ties.

“The com­pa­nies that lost a large amount of value were Stein­hoff and Re­silient. With the ben­e­fit of hind­sight and, now that more de­tailed in­for­ma­tion has come to light re­lat­ing to both com­pa­nies, the con­sen­sus is that the loss in value was not at­trib­ut­able to hedge funds, but rather due to ac­count­ing ir­reg­u­lar­i­ties with Stein­hoff and val­u­a­tion con­cerns with Re­silient.”

There is a fair de­gree of con­fi­dence among in­dus­try play­ers that th­ese will re­main iso­lated in­ci­dents and that SA has not sud­denly emerged on the radars of hedge fund man­agers abroad look­ing for a quick score.

Ge­orge Tsi­no­nis, head of in­vest­ment an­a­lyt­ics at Ris Cura, is one of those wary of Viceroy as an op­por­tunis­tic gam­bit to profit from the fall­out af­ter their re­ports.

“I think prices fall­ing be­cause of neg­a­tive news cre­ates op­por­tu­ni­ties for the man­agers who are val­u­a­tion driven and will look at th­ese op­por­tu­ni­ties and cap­i­talise on them. Stein­hoff was likely fraud, but not ev­ery sin­gle re­port from the likes of Viceroy is nec­es­sar­ily true or cor­rect.

“It does cre­ate panic and short-ter­mism in the mar­ket, but in­vestors who have done good work and un­der­stand th­ese busi­nesses will cap­i­talise and buy into them at th­ese lev­els,” he says. ●

“We’re in a dif­fer­ent era. So, post-Stein­hoff and post-Zuma, we’re in a clean-up phase

Pic­ture: 123RF — ALEXMILLOS

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