Following the Smart Money

KIM HUBNER Head: Business Development and Marketing, Laurium Capital

At $39bn, the Harvard Endowment Fund is the largest higher education fund in the world.

Over the last two years, the fund has doubled its investments in hedge funds, which now represent a third of its assets. While hedge fund exposure of other US endowments is not this high, it still represents a significant portion of the overall endowments. The percentage invested in hedge funds is as follows:

Despite South African hedge fund managers producing excellent risk-adjusted returns over the long term, the hedge fund industry in South Africa remains small (estimated R40bn) relative to CIS industry assets of R2.4tn as at end March 2019. After a tough few years for hedge funds, with assets declining in 2017 and 2018, we believe that investors lost their faith at precisely the wrong time. Last year, the All Share Index was down -8.5%, while the HedgeNews Africa South African Single-Manager Composite was up 5.2% after fees. Hedge funds continue to fare well into 2019. There is a misconception that hedge funds are risky investments, when in fact South African hedge fund managers are relatively conservative, constraining downside performance and reducing volatility.

Most assets in the hedge fund industry are held in funds with a select few managers who have track records of more than 10 years. These assets originate from a select group of pension funds and high-networth individuals. Flows up until now from retail investors directly and via advisers has been negligible. This is despite hedge funds being available to the public, post regulation by the FSCA under CISCA. We suspect this may be due to the funds not being available to retail investors via LISPs, which are the primary channels used by financial advisers, and also due to the fact that financial advisers and investors alike do not have a good enough understanding of their benefits to be able to invest with confidence.

Some hedge fund managers, like Laurium Capital, have moved their hedge funds from monthly pricing and dealing to daily pricing and dealing, which means they can now be added onto LISP platforms and included in model portfolios, etc. The industry still needs a hedge fund classification framework, which will assist adding the funds onto platforms, and help advisers and investors to better understand the investment strategy of the manager and fund.

Hedge Funds offer 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. The flexibility of hedge funds doesn’t only come from the strategies used – it is also inherent in the relatively smaller size of hedge funds. Smaller funds have the ability to be nimble, react faster to information, and take more meaningful positions in mid- and small-cap stocks.

One of the major reasons to have hedge funds as an investment is for downside protection and diversification. At least 15-20% of an investor’s portfolio should be invested in assets that are non-correlated to traditional investments, which makes hedge funds a key part of any well-diversified portfolio. The Laurium Market Neutral Fund has a correlation statistic to the FTSE JSE ALSI TR index of only 0.17 over time, yet it has achieved 9.7% p.a. after fees since inception (1 January 2019 to end April 2019) versus cash of 6.8% and the equity market of 13.5%, and importantly at very low volatility (risk) of 4.9% versus volatility of 14.1% for the FTSE JSE ALSI TR Index.

Disclaimer: Collective Investment Schemes (CIS) should be considered as medium to long-term investments. The value of your investment may go up as well as down and past performance is not necessarily a guide to future performance. CIS’s are traded at the ruling price and can engage in scrip lending and borrowing. A schedule of fees, charges and maximum commissions is available on request from the Manager. There is no guarantee in respect of capital or returns in a portfolio. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. CIS prices are calculated on a net asset basis, which is the total value of all the assets in the portfolio including any income accruals and less any permissible deductions (brokerage, STT, VAT, auditor’s fees, bank charges, trustee and custodian fees and the service charge) from the portfolio divided by the number of participatory interests (units) in issue. Forward pricing is used. Excessive withdrawals from the portfolio may place the portfolio under liquidity pressures and a process of ring-fencing of withdrawal instructions and managed pay-outs over time may be followed. The Manager retains full legal responsibility for any portfolio hosted on its CIS platform. Where foreign securities are included in a portfolio there may be potential constraints on liquidity and the repatriation of funds, macroeconomic risks, political risks, foreign exchange risks, tax risks, settlement risks; and potential limitations on the availability of market information. The investor acknowledges the inherent risk associated with the selected investments and that there are no guarantees. Prescient is a member of the Association for Savings and Investments SA.