INVESTI NG - HEDGE FUNDS 31 July 201418

Focused on performance

Risk Return: Long Short Index vs. Asset Allocation Funds (3yrs to end April 2014)

Source: Symmetry Survey April 2014 and Profile Data

How you live tomorrow depends on how you invest

today .Laurium Capital is an independent and

owner managed boutique asset manager.

www.lauriumcapital.com

Laurium Capital (Pty) Limited is an authorised �nancial services provider. (FSB License no. 34142)

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%

20.0%

18.0%

16.0%

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

%0.0

Risk

Retu

rn

Ayes and nays

I ncreasing assets from R33bn to R42bn in 2013 represents impressive growth for the local

hedge fund industry in 2013. Boosted by the changes to Regulation 28 (that increased maximum hedge fund exposure to 10%), increased awareness of hedge fund manager regulation, and the imminent hedge fund regulations in CISCA (Collective Investment Schemes Control Act) hedge funds have received more positive attention than in previous years. Hedge funds, and their managers, o�er investors opportunities for real returns and flexible fund management.

Gavin Vorwerg, co-founder and portfolio manager at Laurium Capital, believes that hedge funds o�er managers an unconstrained way to manage money, have a high degree of flexibility and don’t impose limitations that long-only funds may have, like tracking indices. Hedge funds allow managers and investors to “make money in broader parameters.” Long only fund management allows for an investment in a particular share, for example. And typically this would be done if the fund manager thought the share could make money and o�er potential good returns. To buy a share a long only manager would need to like its prospects. Manage a hedge fund – and you can make money from both a positive and negative view.

Hedge fund managers have the ability to short capital – Vorwerg says this

Absolute returnsMany hedge funds aim

for absolute, real returns.

LiquidityCompared to unit trusts, 30, 60 and

90+ day liquidity of hedge funds does not compete. In addition some funds may ringfence. However, if you are looking for a long term investment should this be a concern?

TransparencyIn SA 87% of all manag -

ers disclose portfolios either daily or monthly.

Investor understandingHedge funds remain an

unknown to many investors.

Manager alignment with investor

interestHedge fund managers are big investors in their own funds – many have their own, friends’ and families’ wealth in the funds they manage.

CostsDon’t expect to pay the lowest fees for

your hedge fund. Hedge funds are actively managed, have management and performance fees.

ExpertiseThe latest Novare survey

shows that SA’s hedge fund managers are highly skilled and have an average investment experience of 13.3 years. Hedge fund managers are required to have a FAIS cat IIA licence.

Hedge funds o�er managers an unconstrained way to manage money

is fundamental to any hedge fund – and a logical extension of analysis and research. Unlike a long only manager – a hedge fund manager can buy a share for returns if they like it - and short sell if they don’t.

The flexibility of hedge funds doesn’t only come from strategies used – it is also inherent in the smaller size of hedge funds. Smaller funds can be more nimble, react faster to information, and take more meaningful positions in mid and small cap stocks. An ideal size for a hedge fund is most often given as R500m – R2bn. In the hedge fund space in South Africa, Vorwerg says R3-4bn is considered big, whereas in the long-only space, that would be a very small manager.

Performance is key to a hedge fund manager. “Hedge funds are super-focused on performance and generally less focused on asset gathering,” Vorwerg comments.

Appreciating this is one of the keys to understanding most of the South African hedge fund market. The managers are highly skilled and experienced, invest in their own funds, and well regulated.

To label all hedge funds (and hedge fund managers) as high risk may be misleading. The risk profile of a particular hedge fund depends on the mandate of that fund – some mandates may be very aggressive, while others may be designed to focus on hedging and delivering low volatility returns. Compared to the risk return profile of the

multi asset CIS category, Long Short funds, which are the most common funds in South Africa, o�er better returns at lower volatility (see graph below). There are hedge fund mandates to accommodate a range of risk appetites, Vorwerg observes. Key factors that must be assessed when considering a hedge fund

are net exposure, gross exposure, position sizing, sector concentrations, and liquidity risk.

Hedge funds are not suitable investments for every investor. You do need to have a decent amount of funds available to invest, and if you are in a Reg 28 structure your exposure will be limited. In addition – the fees are higher than most other CIS funds. Vorwerg says that if you generate alpha then investors are generally happy to reward you for it.

Vorwerg sees long-short equity hedge funds as a protected equity strategy. What these hedge funds generally o�er is less beta exposure, and their investment objectives are real returns. In a world where real returns should be the ultimate investor goal this is their unsung advantage.

Gavin Vorwerg