Im­pres­sive per­for­mance even in tough times

It is of­ten risky to invest in hedge funds as they are vul­ner­a­ble to sig­nif­i­cant volatil­ity and black swans. With this in mind, Craig Gra­didge takes a look at a hedge fund with a great track record.

Finweek English Edition - - MARKETPLACE PRO PICK - Ed­i­to­rial@fin­week.co.za Craig Gra­didge is a co-founder of Gra­didge-Mahura In­vest­ments.

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not like hedge funds. They make me ner­vous. But my role as an ad­viser to my clients de­mands that I keep an open mind about all in­vest­ment op­tions. My ner­vous­ness around hedge funds stems from our in­vest­ment phi­los­o­phy which pri­ori­tises cap­i­tal preser­va­tion, and the spec­tac­u­lar fash­ion in which some hedge funds have blown up over the years. They can also be hellishly ex­pen­sive. When­ever there is a “black swan”-like event, or sig­nif­i­cant volatil­ity, there is usu­ally a hedge fund some­where in the world that gets wiped out (i.e. in­vestors in those funds lose their en­tire in­vest­ment).

Hedge funds in South Africa have had an in­ter­est­ing last decade with the pub­li­ca­tion of the Hedge Fund Reg­u­la­tions in Au­gust 2007. In 2015, we saw hedge funds be­come reg­u­lated as a prod­uct with the in­tro­duc­tion of Re­tail In­vestor Hedge Funds (RIHF) and Qual­i­fied In­vestor Hedge Funds (QIF).

In­vestors in QIFs are de­fined in FSB Board No­tice 52 of 2015 as any per­son who in­vests a min­i­mum of R1m per hedge fund and who has demon­stra­ble knowl­edge and ex­pe­ri­ence to as­sess the mer­its and risks of a hedge fund. Al­ter­na­tively, they must ap­point a fi­nan­cial ser­vice provider (an ad­viser) who can demon­strate such knowl­edge and ex­pe­ri­ence. A RIHF is a fund that any in­vestor can invest in as it meets the re­quire­ments set out by the FSB. RIHFs have tighter risk pa­ram­e­ters to op­er­ate in, have monthly re­port­ing and usu­ally have smaller in­vest­ment min­i­mums.

Hedge funds are clas­si­fied as Col­lec­tive In­vest­ment Schemes, as are unit trusts and ex­change-traded funds (ETFs). How­ever, hedge funds are able to em­ploy cer­tain strate­gies and en­ter into cer­tain trans­ac­tions that unit trusts and ETFs can­not. They are al­lowed to sell shares that they do not own, and bor­row money to invest. It is these ad­di­tional op­tions that can ei­ther be a source of ad­di­tional re­turn or of­fer down­side pro­tec­tion in a volatile or weak mar­ket. But done badly, these ad­di­tional op­tions can lead to sig­nif­i­cant losses or even catas­tro­phe.

Ac­cord­ing to the No­vare 2016 Hedge Fund Sur­vey, R68bn is in­vested in hedge funds. This com­pares to the over R2tr in­vested in unit trusts. The sur­vey also found that fees have started re­duc­ing, and man­agers are us­ing higher hur­dle rates at which per­for­mance fees kick in. This bodes well for clients in terms of over­all costs. The ma­jor­ity of funds are clas­si­fied as QIFs (67.8%).

They are al­lowed to sell shares that they do not own, and bor­row money to invest.

The Ob­sid­ian Multi-As­set Re­tail Hedge Fund (OMARHF)

I was in­tro­duced to the OMARHF ear­lier this year. My usual re­frain to the topic of hedge funds is: “This is one party I am happy to be late to”, and that was the end of the dis­cus­sion. But it was not too long be­fore my in­ter­est was piqued. Most hedge funds em­ploy one or a com­bi­na­tion of strate­gies to pro­duce re­turns. This was the first hedge fund I en­coun­tered that com­bined tra­di­tional as­set al­lo­ca­tion and “typ­i­cal” hedge fund strate­gies in one fund. The fund can be de­scribed as a five-as­set-class fund, the four tra­di­tional as­set classes plus al­ter­na­tive strate­gies.

The fund is man­aged by re­spected in­dus­try stal­warts Royce Long and Richard Simp­son. They have worked to­gether for close on two decades now, start­ing at RMB As­set Man­age­ment where they achieved great things in the eq­uity and multi-as­set space. The Ob­sid­ian bal­anced unit trust fund is ranked fifth out of 110 over the past five years, and the com­pany has been around for almost 10 years. The fund is priced at 1.5% plus 20% of out­per­for­mance over the bench­mark (CPI+3%), which is not cheap. How­ever, its per­for­mance on a net of fee ba­sis is ex­tremely com­pet­i­tive. In­vestors in the unit trust space have shown a will­ing­ness to back man­agers who de­liver con­sis­tently on a net of fee ba­sis.

The part that stands out for me is the per­for­mance of the fund dur­ing the 2008 cri­sis, as well as in 2016. The fund pro­tected cap­i­tal in 2008, and de­liv­ered a solid 13% re­turn in highly volatile and weak mar­ket con­di­tions. In 2016 we saw a num­ber of hedge funds and multi-as­set unit trust funds tak­ing sig­nif­i­cant strain, de­liv­er­ing ei­ther neg­a­tive or low sin­gle-digit re­turns. OMARHF de­liv­ered a solid 9.2% net of fees.

I still do not like hedge funds, but I’ll ad­mit that it is hard to ig­nore a fund such as the OMARHF fund with its sen­si­ble ap­proach, com­pet­i­tive pric­ing struc­ture, solid track record, and strong man­age­ment team.

And at R50 000 lump sum or R500 per month the fund is ac­ces­si­ble to a broader range of in­vestors than be­fore.

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