Tuesday, 28 February 2012 - 20:00
Hedge funds - The Alternative Asset Class
In the minds of most investors the word hedge fund doesn’t inspire confidence. Hedge funds unfortunately have a bad reputation, which is mostly due to the sensational headlines that get published about some of the offshore funds that went bust. The news stream is one way as legislation prohibits hedge funds from marketing themselves in South Africa.
South Africa’s first hedge fund was started in 1998 due to demand from institutional pension funds that wanted an asset class that would be able to provide a stable cash plus return that wasn’t highly correlated with the markets. This is still the overall objective of most of the SA based hedge funds.
Hedge funds have a few additional tools available that long only and unit trust managers don’t have. Hedge fund managers are able to short instruments (sell assets they’ve borrowed) and use leverage (invest more than R100 for each R100 contributed). If a manager believes that the share will increase in value he will buy it, and sell it when he believes that the share has reached its fair value. If the manager believes that a share is overpriced he will short it, i.e. he will borrow the share and then sell it. After the share has gone down in value he will buy it back at the lower price and return it to the institution that he borrowed it from at a profit. If the share price goes up he’ll make a loss.
The graph below shows how the same fund manager was able to unlock additional returns by correctly deploying these tools.
The blue line shows the cumulative return of a unit trust and the red line the cumulative return of a hedge fund managed by the same manager. The funds have the same investment strategy and process, with the major difference being that the manager is able to make use of shorting and leveraging in the hedge fund.
As with unit trusts you get different types of hedge funds. The three main strategies employed are Long Short, Market Neutral, and Fixed Income. Long Short funds try to profit by buying companies that they like and shorting those that they don’t. Market Neutral funds aim to remove the market risk from funds, by pairing long and short positions. Fixed Income funds make use of fixed income instrument like bonds, interest rate swaps, interest rate futures, etc.
The table below shows how hedge fund returns compare to other indices. The returns of this hedge fund index are compiled by a local asset manager of hedge funds that partake in their monthly survey. The returns are cumulative until the end of January 2012.
The hedge fund strategies might not outperform the ALSI over all periods, but are more consistent in their returns. From the graph below you can see that over a 5 year period hedge funds were able to provide comparable returns to the ALSI at a much lower risk levels.
There are some drawbacks to hedge funds. Hedge funds are not FSB approved, but hedge fund managers must have an FSB Category IIB license to manage a hedge fund. The fund managers try to overcome this hurdle by providing transparency in their dealings, independent custodians, administrators, and compliance. The entry point for hedge funds is higher than unit trusts as the minimum investment is generally R1m. Most hedge funds trade on a monthly basis and might have notice periods for disinvestments.
Hedge funds aren’t suitable for every investor, but can provide an excellent building block in your asset allocation. Hedge funds are not highly correlated with other assets. They provide more stable returns than most asset classes and are able to provide some capital protection in bear markets.
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Tue, 28 Feb 2012
Impala Platinum, the world's second-largest platinum producer, said on Tuesday the costs of an illegal strike at its key Rustenburg operation in South Africa have reached 100,000 ounces and a loss of income of 2 billion rand.
South African stocks rose on Tuesday, reversing the previous session's slump as strong results from FirstRand lifted other financials and a fall in the oil price boosted global shares and domestic miners.
A British photographer wounded in a Syrian army bombardment of Homs was smuggled safely into neighbouring Lebanon on Tuesday, but the fate of other journalists trapped with him was unclear.
The young Japanese woman clutches a beige blanket tight around her shoulders as she stares into the distance. Behind her hulks twisted metal and splintered wood left by the tsunami that devastated Ishinomaki, her hometown.
Sonia Gandhi, the head of India's ruling Congress party, has travelled abroad for routine medical checks six months after undergoing surgery in the United States, a spokesman for the party said on Tuesday.
Grindrod Ltd. shareholders are advised that the final results for the twelve months ended 31 December 2011, are expected to be released on 29 February 2012. Grindrod is holding a final. . .
The board of directors of Stefanutti Stocks announce the appointment Zanele Matlala as an independent non-executive director of the company and as a member of the Audit, Governance and Risk Committee. . .
According to Business Report, Afgri Poultry has been appointed as supplier to the KFC chicken chain restaurants owned by Yum. Afgri Poultry, the broiler producing and processing arm of Afgri, will. . .
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Latest Consensus Changes**
|NED||NEDBANK GROUP LTD||HOLD||24 Feb|
|SBK||STANDARD BANK GROUP LIMIT...||SELL||24 Feb|
|AIP||ADCOCK INGRAM HLGS LD||HOLD||24 Feb|
|BTI||BRITISH AM. TOBACCO PLC||HOLD||24 Feb|
|IPF||INVESTEC PROPERTY FUND LT...||HOLD||24 Feb||
|Expected||Company Name||Fin. Date|
|29 Feb 2012||BRIMST-N||December 2011 (Final)|
|29 Feb 2012||BRIMSTON||December 2011 (Final)|
|29 Feb 2012||CAPCO||December 2011 (Final)|
|29 Feb 2012||DELTA||December 2011 (Final)|
|29 Feb 2012||FERRUM||December 2011 (Interim)|
|ZURICH SA||12-02-06||12-02-24||12-03-05||R 2.0000|
|TFX||Top Fix Holdings Ltd.||29/02/2012||Confirmed|
|JDH||John Daniel Holdings Ltd.||02/03/2012||Confirmed|
|EOH||EOH Holdings Ltd||06/03/2012||Confirmed||
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