By Gerbrandt Kruger
Globally hedge funds have a bad stigma around them, and unfortunately our local hedge funds have been painted with the same brush. While hedge funds aren’t currently regulated in South Africa, the fund managers are. Over the past year the FSB and Treasury have been working together in bringing hedge funds in under collective investment schemes regulation.
Hedge fund managers like Visio Capital and 36ONE Asset Management have both been managing unit trusts for close to 10 years with great success. The graph below shows the cumulative investment growth of the Visio BCI Actinio and 36One Met Flexible Opportunity funds. While both of the funds are in the ASISA Flexible sector, they are typically fully invested into equities.
Over this period both funds comfortably outperformed the All Share Index and the Average General Equity fund. Both fund managers build their portfolios from the bottom up by doing fundamental research on the underlying companies.
Some of the other hedge fund managers that have been making name for the last couple of years are Fairtree, Laurium, Bateleur and Tower. Sanlam has approached Capricorn, Matrix and Kaizen to manage some of the Sanlam Select funds on their behalf. Below is the trailing performance of the funds compared to their peers.
Does a hedge fund manager bring something different to table compared to a traditional fund manager?
Firstly, good hedge fund managers aren’t content with an analyst or broker report. They are not afraid to do the hard work of valuing a company themselves. They are not afraid to get on a plane or bus to go visit the company sites. They don’t only meet with the company’s management, but also meet with their competitors and suppliers. They try to understand the full value chain and where in the chain the company fits in. They do deep, thorough fundamental research on the companies.
Secondly they are used to shorting (selling) a company. A long only unit trust manager is typically only focused on finding good companies. A hedge fund manager isn’t only focused on finding good companies, they are also experienced in searching for bad companies. Therefore, they know which companies to avoid.
Thirdly, hedge fund managers are able to understand and use options in protecting capital and reducing the volatility of their funds. Not all of the hedge fund managers make use of options, but those who do know how to use them in the most cost effective way to enhance the return of their funds.
So do hedge fund managers bring something different to the table? In my opinion, yes. Their different return profiles blend well with other managers during the portfolio construction process. We make use of hedge fund managers to manage long- only strategies in the Seed Absolute Return and Seed Flexible funds.
