Forget 10 baggers; here’s how Peregrine Capital’s pioneering hedge fund delivered 100x for investors

The fairytale story of Peregrine Capital's pioneering hedge funds translated into unicorn-type returns for early investors, delivering a return of more than 100 times their capital. In this interview, the company's CEO and portfolio manager, Jacques Conradie, lifted the veil (a little) and even shared some specific examples. He spoke to Alec Hogg of BizNews.

Timestamps below

• Jacques Conradie on what hedge funds are – 01:31
• On if they outperform in good times – 02:29
• On the two hedge funds – 03:46
• On his academic background – 05:46
• On keeping emotions under check when investing – 08:04
• On the successes and failures – 09:40
• On Angular and Transnet – 12:45
• On not following his traditional career path – 15:45
• On how they delivered double digits in 2022 – 17:42
• Looking ahead to 2023 – 20:32
• On the big plans for the 25th anniversary – 21:54

Jacques Conradie on the Hedge Fund offering insurance and protection in bad times and if they outperform in good times

Yeah, I think there are two clear goals here, our job is, and I think what our clients want from us is in down markets when times are tough, we want to do better than equity funds and balanced funds at that stage. And I think we and some of the other leading hedge funds have certainly done that. Then the trade-off that there is – you try to run the portfolio a bit more conservatively.

We've got lower volatility than the typical long-only fund, but we want to make sure that, over time, we also keep up with markets, and the cycle. So what you tend to find is in a year where the market just runs 20 or 30%, like maybe a 2021 or 2010 after the global financial crisis in those years, we might find it slightly harder to fully keep up with that raging bull market, but because of the fact that in the years where the market will be down 20 or ten percent, we might often be flat, we might be up, we might be down slightly through the cycle, it adds up to us, hopefully significantly outperforming the market or the balanced fund category. But the times when we must really shine as investors is in sideways or down markets.

On their two flagship hedge funds

So we've got two flagship funds, the high growth and the pure hedge fund. If you invested a million rand in high growth, that would be about 130 million Rand where we're sitting. So about 130 times. I think we're the only fund above 100 times. And then pure hedge, which is our much lower volatility fund. That million would be about 75 million right now. And I think the interesting bit is that's been done while never having a negative year. And I think that might be a constant even globally that there are many hedge funds around that's done 75 times the money but without ever having a down year. While always managing the downside volatility in that time.

Also read: Learnings and investment advice from South Africa's longest-running hedge fund manager

On how they were able to deliver double digits in 2022 when most people lost money

Our model is trying to look for ideas where everyone is not looking. I mean, we're happy to find ideas that everyone is seeing, but I think because we're a boutique-size fund, it means you've got a wider universe than a large, long-only manager. And that gives you the opportunity to find opportunities that others might not have in a reasonable size. So we don't need the overall market to do well for us to do well. And I guess if I look at that, the key winners last year, I'll maybe just touch on one or two, but their shares we found that didn't need the market to do well.

So Outsurance was identified in that stable. It's a fantastic business. I personally think it's a top five company in SA if you look at what they've built in 20 years, they are one of the very few that have been able to replicate success in other countries showing how good they are; that they went to build fresh businesses in Australia, that's now 6% of the Australian motor market – from scratch, which is really unique. 

I mean, most African companies buy an established business, and they somehow mess it up and then after leaving or sell it or lose money on it. I mean some of us do start from scratch, just spend money on marketing, and build a team that is truly exceptional. And that was sitting in there with Discovery and Momentum, and we knew ourselves in the market, they wanted access to Outsurance. You didn't want the other stuff with it because very few investors want all three of those. So when Herman Osman decided to clean up the structure and unlock that value, we just saw that as a fantastic opportunity. And we knew that regardless of whether the market did well or poorly. Offshore investors and SA long-only's would eventually see the value we saw in Outsurance. And so, as a hedge fund, you could put that trade on before it. You buy the RMI, you short out Discovery and Momentum, and you create your Outsurance before the long-only's can, and then eventually, when the unbundling happens, they will then come by, or the offshore investors will then come back. So that's really the bread and butter stuff that hedge funds can do that you can't do if you don't have the flexibility on mandates.

So that was one. And then the Thungela we touched on was another. I think those two made a key difference. But then also, I think running more conservative portfolios, running more cash and trying to be a bit more in and out of opportunities last year than just trying to ride the overall market. I think all of those things added up.

On looking ahead to 2023

Your scoreboard starts fresh every year. So we've got to go and do it again in the year ahead. we are somewhat cautious, especially after the rally we've seen so far in Jan and then early Feb in SA, and globally we've been selling into this. So we've been taking down our overall market exposure with only about 50% exposed to the equity market right now. And of that 50 on 20% of those, we've got options on the US market to protect us from downside.

So we are very conservatively positioned and even more than last year, saying that we need to find specific ideas where there are catalysts or value unlocks or specific companies that do play in various sectors to generate return for investors this year.

But we don't want to take massive overall market exposure. And the main reason being we're still unsure how the aggressive right thoughts of the late last year will feed through into the economy and markets. Now the US economy just seems to be pumping ahead, which makes me somewhat nervous that they've got to push harder on rates or keep it higher for longer, which probably adds more risk. So you always have to balance protecting the downside and then still being on the front foot and not just sitting too conservatively. So we're trying to do both of those, but probably leaning somewhat conservatively right now.