Were there red flags before Third Circle’s dramatic losses?

The fund that lost 66% in two days was already by far the most volatile amongst its peers.

CAPE TOWN – According to figures from Morningstar, the Third Circle MET Target Return Fund was nearly three times more volatile than any fund in its category. This was in the period before it lost investors 66% in just two days.

For the year to the end of November 2015, the fund showed a standard deviation of 35.33, while the next most volatile fund in the South Africa multi-asset flexible category showed a standard deviation of 13.08. On 11 and 14 December the fund suffered draw downs of 35.14% and 47.46% respectively, blowing out its 12 month standard deviation to 71.70 by the end of 2015.

The volatility of this fund was just as extreme when looked at over a three year period. For the 36 months to the end of November 2015, the Third Circle MET Target Return Fund showed a standard deviation of 27.68.

The next most volatile fund in this category produced a standard deviation of 11.72, and only four others showed a standard deviation of over 10. The mean for flexible funds over this period was 7.64.

The losses in December were also not the first major pull-back that the fund had experienced, although they were by far the most severe. Since the start of 2013, the Third Circle MET Target Return Fund had experienced monthly draw downs greater than 15% on three separate occasions.

The first was in May 2013, when it dropped 19.92%. It also fell 15.57% in December 2014, and more recently it shed 21.21% in August 2015.

Remarkably, the fund was up just over 40% for the seven months to the end of July before the August losses. This in a period when the JSE was up just 5%. This shows that there was major upside volatility as well.

The below graph shows the fund’s cumulative performance since the start of 2013, illustrating the huge swings in its monthly returns:


Screen Shot 2016-02-02 at 4.33.31 PM

Source: Fund minimum disclosure document

Month;y returns over last year

Screen Shot 2016-02-02 at 4.33.43 PM

Source: Fund minimum disclosure document

The Morningstar figures also show that there were three months since the start of 2012 in which the fund gained more than 10%. This makes it a significant outlier in this category in terms of variance of performance.

A comparison with two other funds bears this out. For the three years to the end of 2015, the Autus BCI Opportunity Fund was the top performing flexible fund in South Africa, and the Cadiz Equity Ladder Fund was the second worst.

The below table shows their relative differences in performance to the end of November.

Comparison between South African Multi-asset Flexible Funds 2012-2015


Third Circle MET Target Return Fund

Autus BCI Opportunity Fund

Cadiz Equity Ladder Fund

Best month




Worst Month




No. of monthly gains above 5%




No. of monthly losses greater than 5%




Source: Morningstar

It is clear that even before the massive loss in December 2015, the Third Circle Fund was displaying extreme, and unusual, volatility. When Moneyweb asked the CEO of Metropolitan Collective Investments (MetCI), Mickey Gambale, whether this shouldn’t have been an indication that the fund was taking on undue risk, he would only say that they were still investigating.

“MetCI is conducting an investment and operational due diligence on Third Circle Asset Management,” Gambale said. “As part of this process we are evaluating the relative appropriateness of the strategy to achieve the stated outcomes of the portfolio.”

He said that this investigation needs to be completed to allow for a fair assessment of the fund’s volatility and risk characteristics.

“I think it’s important to note that the fund aims to offer stable positive returns, mainly in the form of capital growth,” Gambale added. “The portfolio is suited to investors with a moderate to high risk profile and a three to five year or longer investment horizon. We will thus take this into account when vetting the strategy of the portfolio to its stated objective.”

What is quite evident is that the fund has not offered returns that can be considered ‘stable’ by any definition. It has also shown itself to be significantly more than ‘moderately’ risky. These issues will have to be addressed by MetCI.

Gambale originally told Moneyweb that MetCI investigation would be complete by the end of last week. However, on Monday he said that “a few more calculations still have to be run” and the analysis is therefore still “a work in progress”.



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Certain Boutique Managers (mom and pop shops) should be regulated more with regards to the usage of ‘’naked options’’ due to the nature of these products.
These exotic options is a very dangerous product as it does not offer the protection intended to hedge all kinds of directional movements during high volatility movements.
I would like to see the application of the FIAS act pertaining to these types of ‘’zero premium cost ‘’ options, especially with regards to the retirement funds.
Certain brokers does not understand these products and they do not identify the actual risk when putting their hedging into place.
When entering into an exotic derivative utilising a zero premium certain brokers seems to think that these strategies is risk free and more often than not, only caps the upside movements etc., by giving away some of the gains made to the upside.
My view that the statement by Third Circle ‘’ that the hedge that they had in place through options on the Top 40 also did not provide the protection they anticipated it would’’, is shocking, hence e my view that only vanilla option strategies should be allowed.
My view is that the administrator, Metropolitan Investments statement that ‘’neither of these fact sheets ‘’were approved by them and that they are ‘’now conducting a thorough analysis of the portfolio to look at exactly what happened in December’’, does not have a cooking clue what risk management was employed, in line with compliance.
My view is that Standard Bank, as trustees also did not do any investor that invested their money through this asset manager any favours, in line with compliance, and adds further insult to injury.

“MetCI is conducting an investment and operational due diligence on Third Circle Asset Management,” Gambale said.

Surely that is something one does BEFORE allowing any funds to use your management company license?

Can investors not claim that MetCi was negligent in allowing this fund manager use of their license (as they obviously didn’t do a due diligence on the product)? If so, there may well be recourse to MetCI’s Fidelity Insurance cover.

Well said TK!

I used to be a pension fund trustee for about 15 years in a big International Bank, together with a colleague with extensive Treasury experience as well.

We both sold a plethora of FX and interest rate options (vanilla only) to most of the big corporations in the market. We always made certain that the clients knew exactly what their worst case scenario would be, in line with the nature of these derivatives.

After our first couple of meetings, when we started analysing our investment portfolios we immediately realized that the bank were running large derivative structures, which is against the pension fund regulations.

We instructed the administrators to set up meetings with the funds where all the funds were invested (Sanlam, Liberty Life, Momentum, Old Mutual, Metropolitan etc), to report back on all types of investments held with them etc.
Only one of the above-mentioned managers contravened the pension fund act with unauthorised derivative structures. Amazing thing was that they ‘’this company denied’’ that the structure was a derivative. We then informed them that we wanted this ‘’option exercised’’, which they agreed to and exercised it.

It is my view that both MetCI and Standard Bank Trustees could be liable for some of losses due to negligent compliance.

A zero-cost option structure that offers limited upside and unlimited downside is like “picking up pennies in front of a steamroller”.

“We humans are the victims of an asymmetry in the perception of random events. We attribute our successes to our skills, and our failures to external events outside our control, namely to randomness.”
― Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable

A bit harsh.

Clearly the biggest red flag was Zuma.

End of comments.





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