It is actually quite a challenge for a curious South African, interested in worldwide South African hedge fund funds and performances to get a feel for the hedge fund sector using Google or any other search engine.
The current dominant ‘googlable’ narrative presents an impression of hedge funds around the world struggling with disappointing performance, outflows and pressure on fees.
See examples of these articles published by Bloomberg, The Guardian and the Financial Times. Some of these articles refer to ‘the hedge fund world’ and ‘the hedge fund industry’ or even ‘global hedge funds’ when they really mean ‘developed country hedge funds’.
Some perspective and South African reference points are called for. Given that the 2016 Preqin Global Hedge Fund Report shows that the worldwide hedge fund industry is currently valued just over at $3 trillion in assets and that 94% of the world’s hedge fund managers are based in developed countries, it follows that international news coverage ‘follows the money’.
Graph A below shows a breakdown of hedge fund manager assets by region.
The observations noted in the publications mentioned above make no distinction between market conditions, inflows and performances in developed markets and their emerging market counterparts. Since the beginning of 2016, there has been a marked diversion in investment performance between fund returns as classified by primary regional exposure.
However newspaper and media reports from the US and Europe have routinely failed to acknowledge the fact that emerging market hedge funds (measured over the first two quarters and the first three quarters of this year) have outperformed and that funds in these countries are experiencing inflows and not outflows.
It would take an unwary researcher with no previous knowledge of hedge funds more than a click or three to discover that measured in terms of primary regional exposure, for the first six months of this year average developed market performances had returns of 2.72% and emerging markets enjoyed returns of 5.61%, led by Brazil (30.61%), India (7.78%) and Russia (11.45%). Unfortunately, the same statistics show that Africa and the Middle East trailed emerging markets with a performance of – 5.28%.
Measured by management firm domicile, leaders for the year to date as of end July 2016 were Latin America (20.02%), Japan (9.39%) and the Middle East (5.87%). *
The performance of South African hedge funds was not mentioned in the Preqin Report, but for the six month period ending June 2016, local researchers estimate that Funds of Hedge Funds enjoyed returns in the region of 1.8% and single fund manager’s performances of just less than 3%.
South African hedge funds are different to developed market hedge funds in many ways.
They obviously have a different regional bias, primarily investing in Southern Africa. They also tend to use a narrower range of investment strategies. Further, judging by analysis in the annual Novare Hedge Fund Survey 2016, the dominant source of investments into South African hedge funds is via Funds of Funds (about 55%) compared to the world average of 24%, according to data from Preqin. Money invested in South African hedge funds from pension funds is estimated at about 10%, compared to the global average of about 23%. The objectives, risk tolerances and time frames of investors obviously have a direct bearing on the strategies selected by fund managers.
At Rosebank Wealth Group, we have had to deal with a number of questions from nervous clients, seeking perspective on the performance of South African hedge funds versus their developed market counterparts. We urge clients to get a better understanding of the differences between hedge funds, their mandates, and different performances in different geographic zones.
In our view it is crucial to compare hedge fund performances with long only funds with similar mandates. It is also important to note that, despite the alternative return profile that hedge funds offer, they still invest in the same underlying instruments as their long only cousins and will not be immune to sector wide issues.
It therefore doesn’t make a great deal of sense to compare hedge fund returns in general with equity indices. It is fairer to compare equity hedge fund returns against equity funds, fixed income hedge funds against bond funds and so on.
For strategies which trade across a range of asset classes (such as global macro or managed futures) the best comparator would probably be the risk-free interest rate in rands.
We urge our clients to compare not only performance relative to an appropriate benchmark, but the risk taken by fund managers as measured by Sortino ratio and maximum drawdown scores, as well as the degree to which performances are correlated with traditional assets.
Considering the risk of a portfolio becomes more important as clients reach retirement and are no longer earning in income, or when the mandate of a particular client is simply to outperform inflation. We propose that in many cases the total risk of a portfolio can be reduced by introducing alternative asset classes such as hedge funds.
*Source: eVestment Hedge Fund Industry Performance Report, June Q2 2016 Click here