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“Whereas previously to invest in a hedge
fund you needed to be a qualified
investor and typically invest a minimum
of a million rand. The new regulations
make RIHFs more accessible...”
the risks around hedge funds. In general,
says Winckler, “South African hedge funds
have proven much less risky than their
international counterparts.”
The combination of flexibility and reasonable risk bodes well for growth. “I think
it is not inconceivable in the next three
years that the hedge fund space in South
Africa will double from the present level of
some R60 billion.
“Laurium runs three hedge funds in
South Africa: a low-risk Market-Neutral
Fund, our flagship Long/Short Fund,
which has got medium risk, and then an
Aggressive Long/Short Fund, which takes
more risk. Our flagship Laurium Long Short
Fund has delivered 14.7% per annum after
fees (10% real return) since inception, at
half the volatility of the JSE All Share Index
(return of 12.5% per annum).
Focus on Risk
Adjusted Returns
Blue Chip chatted to Murray Winckler, co-founder and portfolio manager of Laurium
Capital, about how best to understand the imminent retail investor hedge funds (RIHFs)
to be launched in South Africa under CISCA (Collective Investments Schemes Control Act)
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lobally, the hedge fund industry
is very well established, with
over two trillion US dollars of
assets under management and
a number of sophisticated strategies for
investors to choose from.
By contrast, South Africa has been a
very small industry. Winckler explains: “In
total we have about R60 billion of assets,
so it’s not even 5 billion dollars. Compare
that to the long-only industry in South
Africa, where you have close to R2 trillion
in unit trusts.”
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This can be attributed primarily to regulatory differences. Internationally, Winckler
points out, comparatively light regulations
have allowed hedge funds to develop
extremely flexible financial instruments,
attracting investors including pension
funds and endowments. More conservative South African regulations have meant
that hedge funds have been private investments suitable only for sophisticated investors, and not open to the general public.
This year, things are set to change with
the advent of hedge funds being formally
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registered collective investment schemes
with the Financial Services Board.
“The man in the street in South Africa
will be able to invest in hedge funds,” says
Winckler. “Whereas previously to invest in
a hedge fund you needed to be a qualified
investor and typically invest a minimum
of a million rand. The new regulations
make RIHFs more accessible through a
minimum investment amount of R50 000.
Consequently we expect more demand
from the retail space and pension funds,
and for the industry to grow going forward.”
Given the option to add hedge funds to
your portfolio, investors should be aware
of the particular risk and return benefits to
assess when analysing them. “Hedge funds
are less constrained than long only investment products and incorporate additional
investment strategies such as gearing, scrip
borrowing and short selling. These strategies can reduce portfolio risk, preserve
capital and produce returns with less correlation to that of traditional asset classes.”
Naturally, it is essential for individuals
and financial advisors alike to understand
Protection on the downside
One way to gauge a hedge fund’s performance is maximum drawdown (the peakto-trough decline during a specific record
period of an investment). According to
Winckler, Laurium’s Long Short Fund has
had a maximum drawdown of 10.8% over
eight years, compared with a maximum
drawdown of 37% for the All-Share Index
over the same period. Effectively, he says,
“Hedge funds can protect people from
themselves. When markets get really bad
and sentiments get bleak, many investors
exit the market at invariably the wrong
time: they don’t get back in, the market
zooms back up, and they are out in the
cold.—“So protection on the down side is
one of the big benefits of a hedge fund.”
Understanding the market
To grasp how companies such as Laurium
Capital operate, it is necessary to look
at two key numbers: net exposure and
gross gearing. “Since inception,” Winckler
explains, “the Laurium Long Short Fund
has had an average net exposure of 52%.
Net exposure (long positions less your
short positions) is an important indicator
of potential downside risk
“The other key factor is the level of
gross gearing (long positions plus short
positions).The Laurium Long Short fund
has had an average of 150% gross exposure, which is relatively conservative. Other
funds may run much higher gross and net
exposures, so hedge funds can sit almost
anywhere on the risk return spectrum.
Market Neutral funds on the other hand,
usually involve taking long and short positions of the same size so that the portfolio
is cash or beta neutral, or both. Typically
these funds have a small net exposure to
the market and leverage is used to enhance
returns.
The Laurium Market Neutral Fund has
had an average gross exposure of 121%
and an average net exposure of 5.9%.
Correlation to the market is 0.03% and it
has delivered a return of 12.2% per annum
(net of fees) since inception 1 Jan 2009
to end December 2015, with a maximum
drawdown of 1.3%.
Anyone can play
Up until now, many qualified investors have
invested in hedge funds directly or through
independent risk managers “Now,” Winckler
says, with the changes in regulations, two
of Laurium Capital’s funds should be registered as RIHFs and available to retail investors once approved by the FSB.
“So, exactly the same as any normal
unit trust, individuals will be able to invest
in the Laurium Capital Long Short Fund or
the Laurium Capital Market-Neutral fund.”
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