TAK­ING STRAIN

It will take time for peo­ple to un­der­stand the use and value of hedge funds

Financial Mail - Investors Monthly - - Contents -

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

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