It will take time for people to understand the use and value of hedge funds
With hedge funds adapting to the newly regulated status of their retail offerings as collective investment schemes, fund managers are eager to tap into the broader market.
But the truth is that this market is not very broad at all, and that attracting money from high-net-worth people will remain a challenge.
Hedge funds offer clear benefits to investors who have the means to include them in their portfolio, and the industry is keen to attract those investors to their funds. It won’t be plain sailing, though, and there is room for making these funds more accessible and visible.
Laurium Capital’s Kim Hubner says it’s been a tough environment for investors generally, with money flowing to more cautious assets such as fixed interest funds. “With market returns over the past three years being rather pedestrian (6.8% from the all share), people are not really allocating a huge amount of money to investments; especially not to equities and hedge [funds].
“There are definitely opportunities for hedge funds in the retail space, now that they are regulated under the Collective Investment Scheme Act and can be sold by financial advisers. However, they need to be accessible through linked-investment service providers.”
Interested, but wary, investors might opt for funds of hedge funds as a way to get into the market.
Hubner says she would like to see the alignment of the Collective Investment Scheme Act with Regulation 28 of the Pension Funds Act. What is needed is to allow Regulation 28-compliant unit trusts to allocate 10% of their portfolio to hedge funds, as is the case with pension funds. Regulation 28 enforces portfolio diversification to protect retirement savings that could be at risk from too high a concentration in selected asset classes.
“I think it would change the game a lot [if this were done],” Hubner says. “Multi-asset balanced funds account for about 50% of industry assets, and if those funds could buy into hedge funds we could see the hedge industry grow nicely.
“From a portfolio construction point of view, for a Regulation 28 fund to be able to invest in a hedge funds makes sense. We need that to change, together with access and investor education.”
It is clear that a more complex instrument like a hedge fund will take a little longer to win broader appeal and understanding than other funds.
George Herman of Citadel points out that the benefits of hedge funds are unfortunately most apparent when markets are in turmoil.
“The case for hedge funds was very [obvious] during the 2008 global financial crisis, when equity markets dropped by more than 40%,” he says. “Hedge fund solutions were down by single-digit numbers.
“Overall, if you take a longterm view, they don’t necessarily outperform equity markets at the top; but our focus is not to do that. If a product gives us 75% of equity market upside, but 20% of the downside, that is a magnificent solution.”
This strategy is common among local hedge fund managers, who operate on a very different scale and from different mind-set than movie depictions of high-flying, risktaking New York “hedgies”.
Cy Jacobs of 36One Asset Management says there is a global misperception of hedge funds, starting with the wide array of instruments or products that fall under the classification. “But the SA hedge fund universe is a conservative one. You really only get fixedincome funds and equity funds that trade either as long-short funds or as market-neutral ones. To me, the SA hedge funds in general present far less risk, and the intention is for them to hedge you properly against bad market times and to [provide] a reasonable long [as well as] short portfolio.”
He explains that this results in portfolio and fund construction that combines long-only exposure to equities and a combination of appropriate short positions and other types of protection on the downside.
This is obviously more complex than this seems, and in that complexity lies the challenge for the industry if it is to get more retail clients on board. Proper education of financial advisers is going to be vital if headway is to be made. ●
“There are opportunities for hedge funds in the retail space, now that they are regulated
George Herman … proof came in 2008
Cy Jacobs … global misperception