When co-founding 36ONE almost two decades ago, top SA money manager Cy Jacobs used the opportunity to launch a long/short hedge fund. Initially only for big clients, this massive outperformer was made available to retail investors six years ago. In this interview with Alec Hogg of BizNews, Jacobs explains how a classic hedge funds enjoy major risk and reward advantages over traditional unit trusts – and shares his latest perspectives on which parts of the investment markets are most likely to deliver superior returns.
Excerpts from the interview with 36ONE’s Cy Jacobs
Meeting Stephen Liptz
Interestingly enough, we met during articles at Castle Feinstein, which is now Grant Thornton. We later moved to Simpson McKee because we both love markets. We realised we love markets even during articles. In fact, we were more involved in markets than in articles. Then we moved to Simpson McKee and Simpson McKee was later bought by HSBC and a couple of years after that we did a deal to sell the business that we worked in to Investec for five and a half years. Both myself and Steve were part of that team and when our restraints came to an end in 2004, the two of us left to form 36ONE.
On going into hedge funds
I always had a big interest in hedge funds. Even at our time at Investec, I tried to launch a hedge fund and I was pushed back on it. It’s interesting that after we left, they then decided to copy us and also launch a hedge fund. I think seeing how well it had taken off and how quickly. But I always had an interest in shorting. I loved the idea of finding companies that weren’t going to go up, that maybe something was wrong with or overvalued. And effectively you could borrow someone else’s shares, you could sell that share and hopefully buy back at a lower price and effectively make profits on a declining share price.
The hedge fund industry itself is very small in South Africa. So as a percentage of our total, you know, it’s tiny. You’re talking R30bn, R40bn compared to a couple of trillion. It’s not a big part of the market. There are a lot of international hedge funds that obviously trade in South Africa. They’re our main competitors in the South African market, but it’s a very good market to trade shorts in. There’s plenty of borrowing, lots of prime brokers who are able to give you script and it’s been good. As you know, the likes of Steinhoff and African Bank and many companies over the years that we have hit.
On the JD Group
In 2009, we were short JD Group. In fact, we were looking for JD Group not to go belly up necessarily, but we believed the performance was deteriorating significantly and we’d seen the same thing happen with Protea Furnaces, which basically went to the wall and we believed JD was headed the same way. We were short and Steinhoff just before results in 2009 bought a controlling stake of JD Group. The results came out and they were magnificently good, up 40%. I remember some of the intricate differences. They capitalised their IT costs, they changed the method of provisioning for debtors, etc. And I was the auditor at Castle Feinstein on the JD Group and the Protea Furnaces audit. So, I knew those businesses quite well and I smelt immediately something was wrong. In fact I met Marcus on the day of those JD Group results for the first time ever. I confronted him and I told him that these were not true results.
At the time, I was so naive that I believed potentially the CEO at the time, David Sussman, had pulled one over Marcus. Little did I know that after that, my name tag was memorised quite carefully by Marcus. I came from 361, and after that, our relationship started souring slowly with Steinhoff. I was not getting invited to various company functions, etc. We were always talked about, not in a good light with various brokers on his behalf. And another very interesting story happened at the same time. A certain lady who was a very good analyst wrote an interesting report about JD Group and the fact that these numbers were also pretty much fictitious; independent of us, who worked for a big bank. Their report came out and I said, wow, what a great report. One of the first true, brilliant reports that I’ve seen calling a stock worth maybe 20% of its share price. The following day, that report was retracted by the institution. Ouch. Obviously, Marcus had caused that. And that person who eventually left that bank ended up working for another bank and was never really allowed to tell her story, which would have been a good little extra bit to put in the Steinheist show.
On hedge funds being the lowest risk option
Look, we run everything:, we run long only, both South Africa and offshore. We have balanced funds and we have hedge funds. Our hedge funds are our lowest risk option because the way we run on our hedge funds is the net equity exposure we have. In other words, how much equity we have in our portfolio runs at between say 20% and 50%, where a long only fund will obviously be 100%, a balanced fund, maybe 60% or 70%. So, our net exposure is a lot lower. We have the ability to short, we have the ability to buy structures to kind of protect the capital. You can look at it in bad markets and you can see that our hedge fund in bad markets has performed better than any other type of asset class that’s available to invest. So, we’re not down this year, we’re up. And we came off a very good year last year. We actually beat the market last year by making 26 odd percent. The reason we’re up is because we’ve had good shorts.
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