The short answer
Latest incidents raise questions about how hedge funds are run and the role they play, writes Johann Barnard
Hedge funds, and the benefits they can derive when shorting a stock, hit the headlines again in the past year.
Many investors feel hard done by concerning two incidents in particular: research outfit Viceroy claimed misdeeds at Steinhoff and misstatement of defaults at Capitec.
The Steinhoff report was probably less decisive in the company’s share price collapsing as Markus Jooste had already resigned, pointing to a serious crisis. The Capitec report, however, is still vigorously disputed by the lender and has come under criticism for apparent opportunistic motives.
Even though Viceroy itself is not a hedge fund, it is believed to be working with funds that had been short on these stocks.
The commotion has done little to foster positive sentiment toward hedge funds, especially their most potent weapon: shorting.
This issue was also the topic of a heated exchange between hedge fund manager 36One Asset Management and management of Resilient Property Group. The company’s shares have suffered this year after a report by the fund manager was leaked that claimed manipulation by company management of valuations.
Investigations and media reports since have confirmed the validity of these suspicions, while the property group has maintained that the report was produced because 36One had a short position on its stock.
36One co-founder Cy Jacobs has confirmed the short position, but rejected claims that the report was a Viceroystyle tactic to lower the price.
The details of this case apart, these latest incidents do raise questions about how hedge funds are run and the role they play. Jacobs says these incidents have introduced greater uncertainty about the veracity of corporate reporting.
“What has changed is that people are more wary, and unfortunately it has brought the whole market down a bit. It could also be because SA is no longer viewed as the premium destination for corporate governance and accounting standards.”
This creates an opportunity, he suggests, to fix these failings and set the investment industry on a new path.
“We’re in a different era,” he says. “So, post-Steinhoff and post-Zuma, we’re in a clean-up phase and there’s going to be a lot more scepticism about what management tells people. And
people will be wary of any complex structures, such as those they had in the Steinhoff group.
“And you can see it already. There are a lot more questions being asked of listed companies than there was in the past.”
Though there is little real fear that these incidents might taint local hedge funds’ reputation, there is always the possibility of contagion if the issues and mechanisms are not clearly understood.
Novare Investments’ Neil Verster says bringing hedge funds into the retail space will help to grow that understanding among investors.
“There’s still a need for education in this space, to alter the misconceptions many investors have about hedge funds,” he says. “In our view, the Viceroy incident was not a negative for hedge funds. Though some managers were on the wrong side of the related trades, it highlights the value of being able to short securities.
“The companies that lost a large amount of value were Steinhoff and Resilient. With the benefit of hindsight and, now that more detailed information has come to light relating to both companies, the consensus is that the loss in value was not attributable to hedge funds, but rather due to accounting irregularities with Steinhoff and valuation concerns with Resilient.”
There is a fair degree of confidence among industry players that these will remain isolated incidents and that SA has not suddenly emerged on the radars of hedge fund managers abroad looking for a quick score.
George Tsinonis, head of investment analytics at Ris Cura, is one of those wary of Viceroy as an opportunistic gambit to profit from the fallout after their reports.
“I think prices falling because of negative news creates opportunities for the managers who are valuation driven and will look at these opportunities and capitalise on them. Steinhoff was likely fraud, but not every single report from the likes of Viceroy is necessarily true or correct.
“It does create panic and short-termism in the market, but investors who have done good work and understand these businesses will capitalise and buy into them at these levels,” he says. ●
“We’re in a different era. So, post-Steinhoff and post-Zuma, we’re in a clean-up phase