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The place for alternative investments in a portfolio

Increasing interest in low-return environment.

A low-return environment and regulatory changes may facilitate increasing interest in alternative assets like private equity and hedge funds.

Speaking at The Money Expo in Sandton, Murray Winckler, co-founder and portfolio manager at Larium Capital, said with roughly R70 billion of assets under management in the local hedge fund industry compared to $3 trillion globally, the industry has the potential to grow quite significantly.

There are approximately 150 hedge funds in South Africa of which the vast majority are equity long-short funds. Globally there are around 9 000 funds.

Local hedge funds have been in a transition phase over the past two years – regulations were amended in 2015 to classify hedge funds as collective investment schemes.

Winckler said due to the new regulation most hedge funds were now available as unit trusts which would improve ease of access. The biggest issue was getting it on platforms so financial advisors could access it on behalf of clients, but the expectation was that some of the funds should be available in this manner soon.

Although Regulation 28 of the Pension Funds Act allows retirement funds to invest up to 10% of their assets in hedge funds and private equity funds, generally investors have remained skittish to take up the opportunity.

Elmien Wagenaar, director at THINK.CAPITAL, said although only a few of the thousands of hedge funds available globally blew up, isolated cases hit the headlines and became representative of the entire industry globally.

Important risks to consider in a hedge funds are how concentrated portfolios are, how correlated the stocks are, how liquid the portfolio is and the leverage applicable. Complexity was also important to consider, she argued.

Wagenaar warned investors not to be blindsided by concentrated, illiquid, highly-geared portfolios with complex strategies.

Although Regulation 28 caps investments in retirement portfolios at 10% for hedge funds (2.5% in a single fund), Winckler argued that given the current environment and the more pedestrian returns expected over the next three to five years, unconstrained investors could consider allocating up to 20% to alternative asset classes.

Jarred Winer, CEO of Westbrooke Capital Management, said alternative assets such as credit, hedge funds and Section 12J funds (which allows tax deductible investments in certain venture capital funds) allow investors access to investments with lower correlation to the market.

Wagenaar stressed the importance of positive compounding and said where investors enjoyed more downside protection it wasn’t necessary to participate as much in up markets to outperform over time.

Although the cost of alternative investments can be significantly higher than ordinary equity strategies, Winckler argued that investors had to consider overall performance net of fees.

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Not at current hedge fund fees. I don’t understand the convention that alternatives or rather hedge funds will help you out in a lower return environment. Why? Because the fees become an almost insurmountable hurdle. Maybe other alternative such as commodities but not hedge funds. Local hedge funds are a monument to ‘cluster pricing’ i.e. there genuinely is no competitive pricing on hedge fund products.

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