HEDGE FUNDS FEATURE
31 July 2020
RAYHAAN JOOSUB Co-founder & Head of Multi Asset, Sentio Capital Management
Hedge funds shine The role of multi-asset hedge funds through to improve risk-adjusted returns investment gloom What makes a fixed-income hedge funds, is the good hedge fund? relatively high correlation these It goes without saying that a good single strategies have displayed hedge fund needs to achieve good relative to their underlying performance relative to its stated markets. These high correlations objectives or benchmark. However, with asset market performance at Sentio we believe it’s just as leads one to question the very important to ask the question, “How merits of these hedge fund was that performance strategies as they achieved?” It’s not effectively become A GOOD HEDGE just good enough high beta leveraged having a high return FUND NEEDS TO plays and defeat if the amount of risk ACHIEVE GOOD the very purpose taken to achieve that of the ‘hedge’ in PERFORMANCE hedge funds. return is excessive, as this speaks to the Compounding RELATIVE TO unsustainability of the problem in ITS STATED those returns. South Africa OBJECTIVES OR recently has We believe that a good hedge fund, in been the highly BENCHMARK addition to generating concentrated good returns, needs to fulfil two nature of the positive performing characteristics, which speaks to the stocks over the past few years, quality of those returns: due to South Africa’s macro1. Those returns need to be economic challenges and the recent relatively uncorrelated to the COVID-19 crisis, which has made natural beta of the underlying it difficult to build diversified hedge asset market like the equity or fund portfolios in the equity longbond markets short space. Hence, managers have 2. Those returns need to display been taking ever-increasing risks positive asymmetry, hence to generate the same level of return providing some measure achieved in the past. As a result, of capital protection in any asset market shock, like we down markets, and upside have seen in March 2020, leads to participation in rising markets. severe drawdowns and negatively skewed, highly kurtotic return Problems with singleprofiles, which is the antithesis of strategy hedge funds what hedge funds are all about. The problem with single-strategy We have also witnessed this funds like equity long-short phenomenon Sentio_Multi-Strat Hedgeor Fund_MM July 2020.pdf 2in fixed-income 2020/06/11 09:14
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hedge funds, which have recently displayed negatively skewed, fat-tailed return profiles. This occurred during the Nene-gate crisis in November 2015, as well as the recent COVID-19 sell-off in March 2020. Market-neutral strategies have also depicted similar poor return profiles during periods of elevated volatility or higher correlations.
Multi-asset hedge funds are a better solution We believe that multi-asset hedge funds are a more sustainable product, in order to mitigate against the issues of single-strategy hedge funds. The ability to generate uncorrelated returns, using a multi-factor approach, together with relative value strategies across various asset classes, reduces the need to maintain unsustainably high beta exposure to any particular asset market and, thus, leads to better risk-adjusted returns. Focusing on multiple asset markets and multiple strategies also allows the fund managers to generate returns for the fund, even if one or two asset markets or strategies are going through periods of poor returns or high instability. This results in high-quality risktaking and improved risk-adjusted returns from multi-asset funds, versus single-strategy funds that are forced to chase returns in a narrow and concentrated universe.
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Hedge funds are showing their mettle as markets continue to experience significant volatility, uncertainty and poor performance across asset classes due to the coronavirus pandemic,” says Marthinus van der Nest, head of Amplify Investment Partners. “By their nature, these funds are geared towards producing relatively superior risk-adjusted returns, regardless of market conditions,” he adds. “The proof has not always been in the pudding, but recent statistics have validated their raison d’être, and rewarded investors for their faith in an often overlooked and misunderstood asset class.” Van der Nest notes that an equally weighted portfolio of four of Amplify’s Fixed Income Hedge Funds returned 9.20% growth for the year to end April 2020, against a 10.4% decline in the JSE All Share index, and a 5.14% decline in the All Bond index. Over a year, the blended portfolio grew 18.1% against the All Share’s decline of 10.78% and a marginal growth in the All Bond index. Over three years, the picture is similar, with the blended portfolio showing 13.5% annualised growth compared to the All Share’s marginal 1.08% growth and the All Bond and STeFI growth of just over 6%.
SUSTAINABLE RETURNS REGARDLESS OF MOVEMENT.
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Visit our website to find out more about our multi-strategy hedge funds.
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www.sentio-capital.com
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Sentio Capital Management (Pty) Ltd is an authorised FSP.
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A majority black-owned asset manager.
