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Opalesque Roundtable: The forgotten lesson from 2008

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When I traveled to Cape Town to conduct this Roundtable, I also spent all day at a cap intro event where the South African prime broker Peregrine Securities presented South African hedge funds to local and some international investors. On such a day you can meet eight or ten managers, and they all have five year plus track records annualising net 15-20% or more. People come and take a look at those managers, and for the right reasons.

While it is impossible to say whether we are at a market high or a market low, but we can look at the scenery and determine if we are in the neighbourhood of a high or of a bottom. Hedge funds follow diverse strategies, and many have very good hedging and shorting skills, so they might become more relevant in the next couple of years as the place to be, relative to the recent history where long-only was a better place to be. And indeed, South African hedge fund managers are now getting approached by managers who were historically allocating primarily to long only managers.

A change of perception - the forgotten lesson from 2008

The hedge fund space a unique skill-based world where some very skilled fund managers actually do better than the markets. That means investors don't lose something by investing in hedge funds, but actually mitigate risk and improve return over the long term. However, the general perception seems to be that investors have to give up a huge amount of return when they invest into hedge funds. But, at the same time, investors should also be concerned about lowering their risk. Hedge funds offer protective mechanisms, but only for those who are not too greedy. With the skill-based world of hedge funds, investors can do much more than the market over the long term, and also benefit from the risk mitigation that is inherent in many strategies.

Institutions, not only in South Africa, tend to be behind the curve and reactive. In a rampant bull market, they are looking at hedge fund exposure and say, “well, it’s not yielding what my long exposure is giving me, there must be something wrong with that…” This issue really comes down to institutions needing to understand that many hedge funds strategies, particularly within the equity space, aim to provide protection in down markets. That means they will often not be able to offer 100% to the upside. There are hedge funds that can outperform even a rampant market, but then downside protection may not be their focus.

In 2008, many hedge funds did what they were supposed to do and helped protect on the downside. But, the dip (and the rebound) was so quick that the long-only managers overtook in terms of returns again within a 12-month period. So, many investors never really got to see or experience the full benefit of that downside protection, because the recovery was so sharp and quick. This could be one factor why hedge funds are still underrepresented in many institutional and high net worth portfolios. If we would have had a bit more volatility or the downturn had been a bit longer, this could have solved the case of hedge funds a lot quicker.

The 2014 Opalesque South Africa Roundtable was sponsored by IDS and Eurex and took place end of 2013 in Cape Town with:

  1. Andy Pfaff, Commodities Fund Manager, MitonOptimal Group
  2. Andre Steyn, Founder and Portfolio Manager, Steyn Capital Management
  3. Claire Rentzke, Head of Manager Research, 27four Investment Managers
  4. Devon Olander, Analyst, Skybound Capital
  5. Ian Hamilton, Founder, IDS Group
  6. James Gilfillan, Chief Investment Strategist, Alpha Wealth
The group also discussed:
  • Investing in Africa: There is significant interest for Africa. Driven by their clients - mainly European single and multifamily offices - some of the very large asset consultants have all been over the continent looking at some of the local managers. With 1,200 listed stocks, Africa offers investors a lot of idiosyncratic opportunities and market inefficiencies. There are approximately 100 Africa-focused funds, many of them managed from outside Africa.
    • Investment process when investing in Africa ex-South Africa
    • Perceived and actual investment risk: why company specific risk is more important than political risk
    • How can investors evaluate corporate governance in Africa?
    • What are Africa’s new top investment destinations?
    • Can Africa funds run an absolute return mandate?
    • Update on the growing African debt market; liquidity and idiosyncratic trading rules at African stock exchanges
  • Opportunities in Commodities
  • New regulations: South African pensions can now invest 10% in hedge funds and up to up to 30% in international equities
  • How new platforms provide access to African and South African fund managers.

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