Hedge funds are dead

OUT OF FAVOUR: SYGNIA PULLS PLUG – OTHERS SURE TO FOLLOW

Performance has been disappointing.

their use of these products.

“There’s no question that hedge funds are out of favour,” says 27four’s Werner Opperman. “Performance has been lower than in the past, and that has been a catalyst for people to pull money.”

Lower allocations

One example of where this has happened is Momentum. Sonja Saunderson, chief investment officer at Momentum Investments, says a few years ago they generally carried allocations to hedge funds of between 5% and 10% in their institutional multi-asset portfolios. However, that is now down to between 2% and 5%.

“When we started the alternatives programme in the group, we loved the idea of what hedge funds could do,” Saunderson says. “We wanted the innovation in our portfolios – their asymmetrical return profiles, the protection they offer and in some instances the leverage they can benefit from.”

However, the lower returns of the last few years and the fact that fees have not come down as much as they would like has caused Momentum to rethink how it uses these strategies.

“Over the last two years or so, especially in the lower yield environment, the performance has been disappointing for us,” Saunderson says.

“With a big balance sheet behind us, we have the ability to go to other investment opportunities like credit, private equity and public-private infrastructure partnerships, so we had to look at the relative benefits between those opportunities and hedge funds, and as a result we did downscale.”

However, this doesn’t mean Momentum has lost faith entirely in hedge funds.

“There is a level of diversification that we get from hedge funds that we still want,” says Saunderson. “We will continue to use them.”

In South Africa, the most widely used hedge fund strategy is equity long-short. In simple terms, these are funds that invest in shares in the same way as any mainstream equity manager in one part of their portfolio, but also have the ability to short shares in another part.

For a number of years these strategies performed very well on average. However, they have not done as well recently during a time when the JSE was trending largely sideways.

The CEO of Sanlam Investments Multi Manager, Selwyn Pillay, says this is what has led to the wider industry losing confidence.

“The sentiment towards hedge funds is at an all-time low, purely because what used to be the flagship of the industry, which is equity long-short, has delivered three years of disappointing returns,” he says.

“That has brought the image of the whole industry down.”