Hedge funds are underwhelming

TRADITIONAL: RETURNS SIMILAR TO LONG-ONLY FUNDS

Multi-asset and hedge funds should be compared with each other, says global asset manager.

So there’s a need to manage some of the apparent risk in these main asset classes, while also finding alternative sources of return.

However, Schroders found the correlation between equity hedge funds and global equities is actually quite high.

Long-short equity hedge funds have found it increasingly difficult to deliver return profiles very different to what investors can find from traditional long-only funds.

Similarly, South African asset managers feel these kinds of hedge funds haven’t delivered the diversification they should.

However, Schroders found in down markets, hedge funds have “shown some potential for downside protection”.

Kyrklund notes: “… the lacklustre returns of recent years and the correlation to equities do not appear to justify the elevated fees charged by many hedge funds.”

The alternative

There are cheaper, more transparent ways of getting similar levels of diversification: through balanced, or multi-asset funds.

“Traditionally, multi-asset funds have been fairly static, balanced funds, combining equities and bonds,” she said. “The multi-asset landscape has exploded in recent years with a wide range of strategies and approaches...”

Seemingly, these more flexible strategies have similarities to some hedge funds in that they generate returns through investing portfolios across different asset classes and strategies, avoid using benchmarks in portfolio construction in favour of outcome-oriented objectives and are focused on generating strong risk-adjusted returns with lower reliance on traditional equity beta.

In SA, investors are comfortable using multi-asset strategies. Over 50% of unit trust money is in balanced portfolios. In most other parts of the world pure equity and bond funds dominate.

This suggests the reasons for using hedge funds in SA are perhaps not as compelling as in other countries.

Local investors already use strategies giving diversification and find uncorrelated sources of return as a matter of course.

Hedge fund managers must consider whether they really offer results distinctly different to those an investor can achieve through a balanced fund.

What’s their real value proposition?

If they can’t answer that, investors are better off in cheaper, more transparent strategies, Schroders notes.

... the lacklustre returns of recent years ... do not appear to justify the elevated fees charged by many hedge funds.

Johanna Kyrklund, Schroders spokesperson