Retirement funds should include hedge funds in their investment plans to ensure they construct optimal portfolios to protect South Africa’s limited savings, said Warren Brown, the head of fixed interest and financial modelling at Old Mutual.
Speaking in Cape Town on Monday in reaction to concerns about the lack of a clear regulatory and taxation regime for hedge funds, Brown said: “The ‘buyer beware’ principle is the safest and most meaningful way for trustees to approach all of their investment opportunities, including hedge funds.
“All of the perceived risks associated with hedge funds can be managed in a similar way to those associated with long-only funds. South Africa’s already regulated asset management industry is littered with failed companies, while respected studies show that risk diversification is improved by including hedge funds in portfolios.”
The Pension Fund Act stipulates that a maximum of 2,5% can be invested in unlisted entities, which would include hedge funds.
Brown disputed the notion that the unregulated nature of the hedge fund industry in South Africa contributes negatively to its risk profile. He said hedge funds are established as legal entities and managers are registered with the Financial Services Board (FSB). Tax laws applied with respect to capital gain and income and provided clarity on the tax status of hedge funds.
“While anticipated regulation of hedge funds specifically as a separate industry is to be welcomed, it’s worth remembering that no amount of regulation will protect the foolish investor. Hedge funds are part of the quickly evolving world of unconstrained investing where transparency will be key in terms of risk management and investor protection,” said Brown.
He said hedge funds were often regarded as a relatively low risk investment option due to their generally consistent returns. However, says Brown, more prominent risks — including operational ones, the risk of fund default and firm failure — should also be considered.
Noting hedge fund failures in the United States, Brown said the best way of addressing these risks was through a fund of hedge funds. “Fund of hedge funds serve as a screen of protection against many of the risks inherent in hedge fund investing.” ‒ I-Net Bridge