A mis­un­der­stood as­set class

Hedge funds have not been met with the same en­thu­si­asm in the South African mar­ket as on the in­ter­na­tional scene. Newly passed amend­ments to the Col­lec­tive In­vest­ment Schemes Con­trol Act could ei­ther see them boom or shrink in num­ber.

RISKSA Magazine - - Med­i­cal - Do­minic Uys secu inve v

Hedge funds have been a pop­u­lar in­vest­ment ve­hi­cle on the in­ter­na­tional mar­ket in re­cent years, and pro­po­nents have hailed them as a ra­tio­nal al­ter­na­tive to the ac­tively man­aged long-only fund. While many say that hedge funds ex­pose in­vestors to sig­nif­i­cantly lower risk, a lack of clear reg­u­la­tion in the South African mar­ket has kept their num­bers low. Hedge funds are pri­vate in­vest­ment funds that tend to mar­ket them­selves ex­clu­sively to wealthy in­vestors. Be­cause the mid­dle and lower class in­vestors are gen­er­ally not al­lowed to in­vest in hedge funds due to fi­nan­cial lim­its, reg­u­la­tors across the globe have his­tor­i­cally al­lowed these funds to op­er­ate with sig­nif­i­cantly less over­sight. South Africa is no ex­cep­tion in this re­gard, but a num­ber of other reg­u­la­tions in the coun­try’s fi­nan­cial sec­tor have ad­di­tion­ally made hedge funds ex­tremely dif­fi­cult to mar­ket to any class of in­vestor at all. Hence, to be­come an in­vestor in a hedge fund, one would need to know the right peo­ple first. These in­vest­ment ve­hi­cles have his­tor­i­cally been mar­keted with the idea in­vestors would be pro­tected from down­turns in the mar­ket, while see­ing above av­er­age re­turns in bet­ter times. That def­i­ni­tion no longer ap­plies, and hedge funds are now bet­ter un­der­stood as ag­gres­sive risk seek­ing funds that typ­i­cally use lever­age to mag­nify re­turns. Since these funds op­er­ate with some­what more free­dom, they em­ploy var­i­ous strate­gies to max­imise profit, and tar­get many mar­kets. Global, macro and di­rec­tional hedge funds typ­i­cally re­ceive the most at­ten­tion, as they of­ten make sub­stan­tial bets on in­di­vid­ual se­cu­ri­ties or sec­tors. While there is a hedge fund strat­egy for just about ev­ery flavour of in­vestor out there, one com­mon strat­egy for the vast ma­jor­ity is to make use of both long and short-term in­vest­ments. WhereWhe long-term in­vest­ment is the straight­for­ward­strai buy­ing of stock with the po­ten­tialpote to gain value over time, short-term in­vesting­inve sees the fund man­ager ‘ bor­row­ing’ stocksstoc that are likely to rapidly lose value, fromf an­other in­vestor.

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