Hedge Funds traditionally offer investors protection during periods of stock market volatility and it seems investors who have stuck with them over the past few years have something to crow about.
According to the latest Blue Ink All South African Hedge Fund Composite (BIC), which tracks the performance of about 100 hedge funds in South Africa, these funds outperformed the All Share Index (ALSI) by almost 10% over a three-year period (January 2008 to December 2010). Hedge fund investors earned total returns of 30,28%, as against 20,6% from equities.
The ALSI three-year return was weighed down by a 23% decline in local equities in 2008 — the kind of downside risk investors avoided by opting for hedge funds.
Eben Karsten, portfolio manager at Blue Ink Investments, say that hedge fund managers typically have more room to manoeuvre than their “long only” peers.
The Fixed Income category topped the 2010 Hedge Fund performance tables, with an average per-fund return of 21,1% (with volatility of just 3,2%) for the year. “Fixed interest strategies benefited from monetary accommodation — particularly the second round of quantitative easing — through 2010,” Karsten said.
Managers in the fixed income space took advantage of the fragile global economic recovery and low interest rates in the United States. “The large differential between interest rates in G10 countries versus those in emerging markets triggered a flood of foreign capital inflows to South Africa’s bond market, benefiting funds with fixed-interest strategies,” Karsten explained.
The BIC showed that local hedge funds returned 9,79% for 2010, compared to the 18,98% produced by the ALSI. The ALSI return was achieved with a volatility of 17,66% versus the 1,86% hedge fund average.
The main “drag” on overall hedge fund performance through 2010 was the disappointing one-year return generated by so-called “market neutral” strategies. Funds in this category returned an average 5,77%, even underperforming the cash rate of 6,92%. “Returns within this strategy remain varied due to foreign activity affecting relative pricing [spreads] between shares,” said Karsten.
The Long Short Equity funds category enjoyed a satisfactory 2010. The category consists of a Long Short Non-Directional category (average return of 12,91% for the year) and a Long Short Directional category (9,29%).
Note: Hedge fund managers are regulated in South Africa, but the funds they oversee aren’t subject to regulation yet. There have been moves to tighten legislation as hedge fund managers glean profits from speculation on whether asset prices will rise or fall, making use of the private capital of individuals or funds. Proceed with caution and think twice about investing your savings if you’re a pensioner.
Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information