Matthew de Wet
The recent attacks in the United States have placed stock markets under significant pressure. This has opened up a number of opportunities for investors and capital is flowing from the equity markets into the perceived safe havens of money market deposits and bonds.
The fact is, however, that interest rates in the US are at a 40-year low (with real interest rates set to become negative). Returns expected from such investments are therefore low.
There are, however, low-risk alternatives to bonds and cash. The flow of money from riskier assets to less risky assets has created inefficiencies in the markets. Hedge funds are in a unique position in that they can employ a number of strategies to take advantage of these market inefficiencies.
Essentially, hedge funds are investment vehicles that aim to provide high risk-adjusted returns and display a low correlation with traditional investments.
The flexibility of hedge funds allows the managers to employ a number of different strategies such as short selling, arbitrage and leverage in an attempt to improve returns and reduce risk. Over the past decade hedge-fund indices have produced returns superior to those achieved by traditional fund managers with less than half the volatility. Usually the hedge-fund manager has a personal stake, an incentive to produce returns.
More specifically, hedge funds that attempt to produce low-volatility, absolute returns should prove popular in the current environment. Funds that, for example, target returns in the region of 8% to 10% a year in dollar terms are viewed as a good alternative to bonds or cash. This against a background of an ever-depreciating rand makes returns available to South African investors very attractive.
A word of caution though hedge funds are unregulated private investment pools. The number of investors is often small, the minimum investment high and there is often a lock-in period. A fund of hedge funds is therefore more accessible as the required minimum investment is usually much lower, they are liquid and they provide diversification across the various hedge-fund strategies.
Matthew de Wet is an investment analyst at Nedcor Investment Bank