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.
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.