27four Investment Managers
29th June 2015
Hedge funds: coming to the people
The jargon of fund management is being extended to include Qifs and Rifs. These are the new classifications of regulated hedge funds. Qifs or Qualified Investor Funds are hedge funds as they exist today, focused on institutions with a minimum subscription of at least R1m. It is the Rifs, or Retail Investor Funds which will break new ground. Rifs will accept sums of R50 000, some even lower than this from smaller investors.
Sanlam has the most advanced strategy on Rifs. Selwyn Pillay, a portfolio manager at its Blue Ink unit says it plans to launch three retail fund of hedge funds, a moderate, aggressive and portable alpha fund.
Portable alpha involves, for example, a passive cash portfolio combined with a share portfolio with the index hedged out, the excess return from the portfolio (alpha) is earned, the market performance (or beta) is not. There will be at least seven underlying funds branded Sanlam; three of these will be managed by Sanlam Alternative Investments, the rest by third party managers picked by Blue Ink such as Capricorn, Visio and Kaizen.
Pillay says he expects little demand from retail investors for very conservative mandates such as cash plus 2%. Blue Ink’s moderate fund will aim for a real return of cash plus 4%-5%; the aggressive a real return of cash plus 6%-7%.
Pillay says there will need to be a great deal of education. The SA industry has focused heavily on institutions, at most 20% of the R60bn in the industry is held by high net worth people.
As hedge funds were previously unregulated, financial advisers have not been allowed to sell them. Says Pillay: “We need to address issues such as leverage and fees.” Gross leverage in hedge funds combines the total long holdings (positions owned) and short holdings (bets that the share prices are going to fall). In retail funds this will be limited to 200%. Net exposure shows the extent to which a fund is exposed to the market, which is typically below 40% in market-neutral funds and around 60%-80% in long/short equity funds.
Fees could prove to be the Achilles heel of retail hedge funds. They seem high at 1%-2% flat fees plus 20% outperformance. The total expense ratios of these funds could be far higher than for conventional unit trusts. Fatima Vawda of funds of funds shop 27four says some hedge funds start to take performance fees at zero. “There is no doubt hedge fund managers are perceived to be greedy. Recently the largest pension fund manager in the world, Calpers, kicked all the hedge fund managers out of its portfolios. Hedge funds need to have a hurdle that is relevant to the client, such as cash or inflation.”
Do hedge funds give the kind of stellar performance to justify their fees? The rule of thumb has traditionally been that they achieve two thirds of the upside but only suffer one third of the downside. The returns in May are instructive, as the JSE was down 4,4%.There were some shocking performances that month with the (somewhat obscure) Sir Edmund Hillary Fund down 10,5% and the equally marginal Trofin Blue Fund down 5,8%. A few funds went up in the month, such as Peregrine High Growth (1%) and Steyn Capital Fund (1,3%), while others had only nominal and forgivable declines such as 36One Hedge Fund (-0,3%) and Coronation Presidio (-0,2%) and Laurium Long Short Fund (-1%).
All these funds have impressive longer-term records, over five years 36One Hedge has returned 20,9%, Presidio 23% and the more conservative Laurium Long Short 16,6%.
Gavin Joubert, portfolio manager of the Presidio Fund, says Coronation has no plans to launch a retail version of Presidio as the institutional fund has been closed to new business for more than two years.
Joubert is one of very few managers at a large asset manager to translate his skills successfully to hedge funds. He says the long holdings in the fund follow the lead of the (long only) Coronation Equity Fund. Seven of the top long positions are also in the top 10 of the equity unit trust. As Presidio is smaller, it can take big positions outside the megacaps — it has taken a 5% bet on Woolworths, for example. But Joubert says more value has been added from short positions (11,2% excess return or alpha per year) than from the long positions (7,8% alpha).
The largest domestic hedge fund player is 36One, with R10bn under management. Jean Pierre Verster, a member of the 36One investment team, says good hedge funds achieve their returns at a lower volatility than the market — 36One hedge fund has about half the standard deviation of the JSE all share (Alsi) yet since inception it has comfortably outperformed with a 20,4% return compared with 14,1% from the index.
Verster says it is good news that the tax status of hedge funds has been clarified. As they will all be classified as collective investment schemes — both retail and qualified investor funds — they will be taxed the same way as regular unit trusts, with tax payable when the units are cashed in. There is still no explicit ruling on the treatment of trading gains, but Verster says the rationale for hedge funds is to grow and preserve capital — and, besides, if hedge fund trading gains are taxed, regular unit trusts will also be vulnerable.
Laurium Capital’s Murray Winckler says that few investment consultants are pro hedge funds, partly because of complexity but also because of fees. “Yet we can defend the net return of our funds, especially on a risk-adjusted basis.”
Winckler argues that 95% of SA funds are conservatively run by international standards.
Malungelo Zilimbola, manager of the Mazi Capital Market Neutral Fund, says the fund has had just 16 negative months since it started in November 2006 and only two of these were more than 3% and its biggest drawdown was 6,9%, compared with 23,3% from the all share, yet the annualised return is 3,4% ahead of the Alsi.
Hedge funds have a significantly higher performance persistency than long-only funds — and that works for the bad funds as well.
Read the full article in the June 25 – July 1 issue of Financial Mail or online in the link below:
Source: Financial Mail
Author: Stephen Cranston