Get your fix... in a hedge fund

Lower risk and bet­ter re­turns

Finweek English Edition - - INSIGHT - SHAUN HAR­RIS shaunhar­ris@ya­

UNIT TRUST IN­FLOWS con­tinue to show the same de­press­ing story. Lo­cal money mar­ket funds at­tract a large amount of money – R3,94bn in May (April showed an out­flow, tech­ni­cal re­ally caused by one fund ex­it­ing). Much of that may be in­sti­tu­tional money be­ing parked for the short term. But it’s known there are also many in­di­vid­ual in­vestors who con­tinue to “save” their money in money mar­ket funds.

Scared of eq­ui­ties and also the more lim­ited risk of fixed-in­come unit trust funds such in­vestors plough their money into money mar­ket funds. At this stage is has to be asked where the real risk lies. The money mar­ket in­vestor might be en­sured his cap­i­tal will re­main safe: but what’s the use of cap­i­tal if it’s not grow­ing at least as fast as in­fla­tion? Cur­rently, in­fla­tion is around 6% up. Is a money mar­ket fund in­vestor get­ting any­where near that af­ter tax?

The al­ter­na­tive is fixed­in­come unit trust funds – and here per­for­mance varies widely ac­cord­ing to the stated bench­mark. It’s a vi­able al­ter­na­tive for con­ser­va­tive in­vestors but they still seem ner­vous.

So men­tion­ing hedge funds will prob­a­bly send their ner­vous sys­tems into tilt. False per­cep­tions are the curse of the hedge fund in­dus­try. Yet South African fixed­in­ter­est hedge funds (sum­marised on the ta­ble be­low into four re­spec­tive hedge fund of funds: HFoF), are con­ser­va­tively man­aged, of­fer lim­ited risk and pro­vide far bet­ter re­turns.

Apart from the hedge fund name, in­vestors are also ner­vous be­cause HFoFs aren’t reg­u­lated. Many hedge fund man­agers (but cer­tainly not all) would like to be reg­u­lated. For some time now it’s been sug­gested hedge funds could fall un­der the Col­lec­tive In­vest­ment Schemes Con­trol Act, just as unit trust funds do. But the Fi­nan­cial Ser­vices Board con­tin­ues to sit on its hands, or has per­haps just for­got­ten about hedge funds. If there’s a po­ten­tial prob­lem the best thing to do is for­get about it, hey chaps?

What the ta­ble doesn’t show ( Finweek short­ened the more de­tailed Ris­Cura ta­bles) is risk. For the two HFoFs that have been around for more than three years, down­side risk is 2,02% for the Al­pha prod­uct and 2,36% for Iconic. For that very lim­ited risk in­vestors are get­ting re­turns com­fort­ably above 10%/year.

But cap­i­tal can be at risk over the short term. For the year-to-date (up to May) the Blue Ink HFoFs was un­der wa­ter by 1,32%. How­ever, for the full year (as shown on the ta­ble) it’s the top per­form­ing fund.

Un­like fixed in­ter­est unit trust funds, fixed in­ter­est hedge funds have the full hedge fund tool­box avail­able to them. They might lever­age bonds and use fixed in­come de­riv­a­tives. That prob­a­bly adds to in­vestor cau­tion. It shouldn’t. Used re­spon­si­bly, the hedges make the funds lower risk. But in­vestors need to re­alise that, like all in­vest­ment prod­ucts, a rea­son­ably medium-to long-term view should be adopted. The fixed in­come hedge funds tar­get not to lose cap­i­tal over an av­er­age three-year pe­riod. If only those ner­vous savers would take a closer, more open-minded look at hedge funds. But they prob­a­bly won’t and will con­tinue stick­ing cash into money mar­ket funds, be­liev­ing it’s a risk-free in­vest­ment. Risk-free? Money mar­ket fund in­vestors have al­ready suf­fered the op­por­tu­nity cost of equity re­turns in the mar­ket. Now they face the risk of be­ing un­able to keep up with in­fla­tion.

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