CAPE TOWN – Local asset manager 36ONE Asset Management has earned international recognition by placing 11th in a recent global hedge fund ranking produced by Bloomberg. The ranking looked at the 2015 annual performance of all hedge funds with assets between $250 million and $1 billion.
The rankings are somewhat incongruous as the fund returns are all given in local currency and therefore not strictly comparable, but they nevertheless give a picture of which fund managers managed to extract noticeable value from the markets in which they operate.
Given that the JSE All Share Index showed returns of just 5.1% last year, the performance of the 36ONE Hedge Fund was outstanding. It also continued its long term track record of delivering consistent market-beating returns.
Since the fund started in April 2006, it has delivered annualised returns of 20.18%. That is against an Alsi return of 12.56% per annum.
An exceptional feature of the fund’s performance is that in the 128 months it has been operating, it has only shown negative returns 22 times, and six of those were in 2008. This is evidence of a good hedge fund’s ability to produce stable returns in all market conditions.
36ONE’s co-founder and portfolio manager Cy Jacobs says that last year’s performance was based on getting the major themes right, particularly in a weak rand environment. The fund runs an equity long-short mandate, so that meant being long in the sectors that performed well, and short on those that struggled.
“The equities we held were rand hedge on the long side,” he explains. “Naspers was probably our biggest contributor again, and we also had decent slugs in SABMiller.
“On the short side, we had quite a few commodity shorts, and we also had retailers at different stages, construction stocks, and some telcos like MTN,” Jacobs adds. “In the last part of the year we also took short positions on some of the food services companies like Pioneer and Tiger Brands.”
In hindsight that seems pretty simple, but of course it’s a lot harder to make the right calls at the right time. The sudden switch in the character of the market in the first few months of this year is evidence of that.
“We are slightly down year to date, having lost a bit in January and after a bad month in February, although we’ve bounced back a bit so far in March,” Jacobs says. “Luckily we covered most of our commodity shorts, but what’s cost us more than anything is that the rand has come back quite sharply and a lot of rand hedges haven’t performed. Naspers also hasn’t performed since December.”
He believes that the rebound in commodity stocks definitely shows a short term cyclical change in the market, but whether it will be a lasting one is difficult to say.
“One thing that may contribute is that almost 40% of Europe is on negative short term interest rates, which makes gold and possibly platinum quite attractive,” Jacobs says. “The rand/gold price is now at near all time highs.
“But it’s difficult to know with commodities,” he adds. “I doubt there is a permanent bull case for these companies. I think that they have maybe just been sold down too heavily on the theme that they were going to collapse, and that became such a crowded trade that any rebound was going to be quite severe.”
Jacobs also believes that the weaker rand and the fact that a lot of mining companies are steering away from rights issues has been positive for share prices. Commodity producers are instead looking to sell assets to convince the market that debt levels will come down and banks are being supportive in this. However it is still difficult to come up with accurate valuations for these companies.
“When you have a very small equity number relative to a company’s debt number and any outlook improves, the gearing is so massive that it’s hard to say what that equity is worth,” Jacobs says.
Nevertheless, the market appears to have bought into the story that they are realigning their businesses. And together with the liquidity being provided by big international banks and the Chinese government affirming that it will spend more to sustain growth, sentiment towards commodity producers has unquestionably improved.
“If rates remain low and stimulus continues, they have a place in the world,” says Jacobs. “Especially if China is still growing at 6.5% to 7% a year.”
The full 2015 hedge fund ranking table is below, and the full Bloomberg rankings brief can be viewed here.