Hedge Funds

Per­for­mance over the past num­ber of years has been lack­lus­tre, writes Jo­hann Barnard

Financial Mail - Investors Monthly - - Front Page -

It’s been a tough time for the lo­cal hedge fund in­dus­try, which has had to deal with net out­flows of about R5bn in 2017. It fol­lows a rig­or­ous process of tran­si­tion to the reg­u­lated col­lec­tive in­vest­ment scheme space that started in 2015.

One rea­son for the change has been to at­tract re­tail in­vestors who want to add more diver­si­fi­ca­tion to their port­fo­lios through th­ese al­ter­na­tive in­vest­ment struc­tures.

The As­so­ci­a­tion for Sav­ings & In­vest­ment SA re­ported in April that this was the in­dus­try’s first de­cline in as­sets un­der man­age­ment since 2011.

There is gen­eral agree­ment that the rea­son for funds flow­ing out is lack­lus­tre per­for­mance over the past num­ber of years.

No­vare In­vest­ments’ Neil Ver­ster says per­for­mance over the past year has favoured fixed in­come strate­gies rather than long-short eq­uity ones. “Hav­ing said that, the lat­ter, as well as mar­ket-neu­tral strate­gies, has pro­tected cap­i­tal in 2018, while the lo­cal eq­uity mar­ket is down for the year to date. Man­ager per­for­mance within strate­gies, how­ever, has been mixed with some per­form­ing ex­tremely well whereas oth­ers strug­gled,” he says.

Kim Hub­ner of Lau­rium Cap­i­tal says that while 2018 is look­ing much bet­ter, the in­dus­try has had a tricky time.

“The mar­ket was tough last year,” she says. “With 50% of re­turns com­ing from Naspers, it wasn’t an easy mar­ket for most hedge funds. They have, on the whole, not done that well over the past two-and-ahalf to three years.

“From an in­sti­tu­tional per­spec­tive, the head­winds have been fees, in an en­vi­ron­ment where per­for­mance has been dis­ap­point­ing. With fee trans­parency [brought about by the Col­lec­tive In­vest­ment Schemes Con­trol Act] ques­tions are be­ing asked about whether hedge funds have de­liv­ered suf­fi­cient risk-ad­justed re­turns for the fees they have charged.”

Th­ese pres­sures aside, Hub­ner says lo­cal hedge funds have on the whole had a much bet­ter year this year, with Lau­rium’s funds up be­tween 6% and 11% to the end of June — sig­nif­i­cantly bet­ter than the JSE Alsi (-1.7%) and the FTSE/JSE capped share­holder weighted all share in­dex (-5.9%).

Hub­ner says there is ev­i­dence that the hedge funds of funds, in par­tic­u­lar, are strug­gling for the rea­sons men­tioned above, but es­pe­cially due to newly in­tro­duced trans­parency. “Now that hedge funds have been reg­u­lated, in­vestors have more in­for­ma­tion about the hedge funds them­selves and are happy to in­vest di­rectly, as op­posed to go­ing through a fund of funds that comes with an ex­tra layer of fees.”

Ge­orge Her­man of Ci­tadel de­scribes this trans­parency as an un­in­tended con­se­quence of the reg­u­la­tion.

“The whole ef­fort was to make the in­dus­try more trust­wor­thy for re­tail in­vestors, more trans­par­ent and more stan­dard­ised.

“It was all for very good rea­sons, but what has come with it is the stan­dard­ised method­ol­ogy of re­port­ing on fees. The first time those num­bers came out in­vestors had a shock re­ac­tion,” he says.

He does not fore­see a rapid re­turn of in­flows into the funds, as the flows are typ­i­cally in­flu­enced by longer-term, struc­tural, sys­temic is­sues.

“The in­ter­me­di­ary en­vi­ron­ment also has a huge role to play, be­cause when [in­ter­me­di­aries] sit with clients one of the big­gest fac­tors they put be­fore them is cost. So, the in­ter­me­di­ary en­vi­ron­ment will have to be­come a lot more so­phis­ti­cated, and that will prob­a­bly only hap­pen af­ter we’ve had a crash, when the value of hedge funds is recog­nised.”

This is a peren­nial chal­lenge for the in­dus­try, one it hasn’t yet man­aged to over­come.

Hub­ner says the eas­i­est way to deal with re­sis­tance on this is­sue is to fo­cus on net re­turns. “We try to avoid look­ing at fees in iso­la­tion, and in­stead gauge the level of cost in re­la­tion to the ex­pected value the in­vest­ment might add, es­pe­cially the abil­ity to re­duce losses and pre­serve cap­i­tal.”

She says hedge funds have by their very na­ture a higher cost base be­cause of the skills set re­quired to man­age them.

“Hedge funds are a lot more com­plex to man­age be­cause there are more mov­ing parts. A long-only man­ager sim­ply buys stocks he thinks are un­der­val­ued. A hedge fund man­ager em­ploys lever­age that can add to your re­turns, but also your risk, and can short shares as well. Man­ag­ing liq­uid­ity is key, es­pe­cially on short trades.”

There ap­pears to be no end to this de­bate, nor to the in­dus­try’s at­tempts to ex­plain the costs be­ing charged.

If it does not man­age to win this, its very ex­is­tence is at stake, which will lead to fur­ther con­sol­i­da­tion in the mar­ket.

Pic­ture: 123RF — TANG90246

Kim Hub­ner … a tricky time

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