8 Things You Didn’t Know About SA Hedge Funds

They aren’t risky. They aren’t complicated. They aren’t run by cowboys.

1. South African Hedge funds are less liquid than unit trust investments and usually have a one month notice period. However, Blue Ink launched daily priced/trading products which have the same liquidity as unit trusts.
2. South African hedge funds are not inherently risky investments. Over the last 10 years, certain hedge funds have shown a significantly lower standard deviation than that of the markets.
3. Leverage does not necessarily mean risky i.e. the mortgage on your house is a leveraged instrument, you put a down payment of 20% to control the full mortgage, a leverage of five times. South African hedge funds apply an average of 1.5X leverage which is not excessive if you compare it to the mortgage on your house.
4. Hedge fund fees are not as complicated as you think. The interest of the investor and the hedge fund manager are very much aligned to each other. Hedge funds charge a management fee and a performance fee like in the traditional space, however performance fees are levied relative to cash and not relative to a benchmark. Hedge funds account for fees by means of series accounting and as such you pay only for performance you have enjoyed and not for performance generated before you joined.
5. The way South African hedge funds are managed is very different to the way the offshore hedge funds are managed. They’re managed by teams who typically come from traditional investment institutions where they have been successful portfolio managers.
6. Hedge funds hedge against downside risk. Some hedge funds utilise other tools at their disposal, such as short selling and derivatives to manage downside risk. In 2008 the equity market was down 23% but some hedge funds were up.
7. Regulation 28 which governs the way pension funds invest, changed in 2011 and it now recognises that hedge funds has a place within pension fund space where they now can invest up to 10% into hedge funds of funds.  
8. Hedge funds have delivered good performance after fees – Over the last 10 years, some aggressive equity managers outperformed the equity market and some fixed income hedge funds have outperformed the bond market.

Related Article: Hedge funds as part of a balanced portfolio

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