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South African hedge funds outperform broader hedge fund indices

Thursday, January 05, 2012
Beverly Chandler, Opalesque London:

South African-based Peregrine Securities, Prime Services division reports that for hedge funds serviced by them returns were pretty positive over 2011. Long/short strategies represent some 85% of assets under management for the firm and the year to date returns over 2011 for long/short equity hedge funds is 17.72% on an asset weighted, cumulative monthly before fee returns basis.

The total figure for equity hedge funds is 15.81% and for market neutral equity hedge funds was 7.58%. After fee returns came down to 15.98% for long/short equity hedge funds; 14.42% for total equity hedge funds and 6.60% for market neutral equity hedge funds.

Peregrine’s Ruth Forssman reported that December saw the year end on a negative note, although the final quarter’s figures remained positive, on the back of the very strong October returns and a mildly positive November. “Perhaps the most significant feature of December, however, was the substantial drop in intra-month volatility, with the market responding in slightly more subdued fashion to events in Europe. Lower volatility is, of course, a key requirement for a less risk-averse market environment favorable to emerging markets” she said.

Equity markets in South Africa generally ended the year pretty close to where they started, with the Resource sector continuing to lag according to Forssman. “Sectors remained fairly highly correlated, however, as the market focused almost exclusively on the generic prospects for global growth. There were some interesting regional differences, however, so that while the S&P 500 ended the year flat (up 2.1% on a total-return basis), it is worth noting that the Shanghai composite ended down some 22%, and the French and German bourses down 17% and 15% respectively. Currencies were also volatile, of course, and these need to be taken into account to get a true accounting of relative performance.”

Forssman says: “South African equity hedge funds have in fact performed relatively well, on average looking better than the global hedge fund average, and better than local equity returns. Performance did vary quite dramatically, though, as the roller-coaster action of the markets meant that even small differences in market timing could have large consequences. The HedgeNewsAfrica Single-Manager Composite index ended November up 4.3%, while the more conservative South African Fund of Funds Composite stood at 7.1%. Very simply put the average investor in SA equity hedge funds in 2011 is likely to find that their capital was essentially protected in real terms for the year, a satisfactory outcome in what the New York Times recently described as a “dismal” year for hedge fund performance”.

Peregrine’s range of hedge funds out-performed the broader hedge fund indices. “While both equity long-short and market neutral funds had a good month (and year), market neutrals continued to lag, with a 1% return for December bringing the year to something not too far from money-market levels for this style. Equity long-short managers serviced at Peregrine averaged an extraordinary 18% for the year, an exceptional number given the global context. While we do think that we service some of the very best of SA’s equity hedge fund managers, one should be aware that the numbers we publish, while useful, are not suitable as performance benchmarks for investors” warns Forssman.

“The numbers are basically intended to give a quick and dirty – and early - indication to fund managers of how the month turned out for significant subset of SA equity hedge fund managers. Firstly, the numbers are, unless otherwise indicated, before fees. More important, though, is that the funds at Peregrine are not necessarily a representative sample of SA equity funds. They are certainly a reasonable sample, but differences of style may well generate significant differences with the major SA hedge fund indices and surveys, especially in certain market conditions. Formally representative indices (for example the various indices tracked by the team at HedgeNewsAfrica) are obviously the preferred option when benchmarking manager performance.”

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