When Sygnia’s CEO Magda Wierzycka announced on Wednesday that the company is closing all of its fund-of-hedge-fund products, she was adamant that this was fully in the best interests of investors.
“This has cost us millions in fees,” she acknowledged. “We have closed down very profitable products.”
Wierzycka said that Sygnia made a decision that it could not continue paying the high fees charged by hedge fund managers when their performance did not appear to warrant it.
What this means is that all investors who have been in these funds have to move to other products. For Sygnia’s institutional investors, this has already happened.
“We are at the end of the process, not the beginning,” said Wierzycka. “The only money left is a few retail investors, but it’s not a lot.”
She said that Sygnia managed the process of withdrawing its funds very carefully to ensure that no investors were compromised in the process.
“We did it gradually over a period of four months,” she explained. “We were also always very cautious investors and made sure that we were never more than 15% of any one hedge fund, because otherwise we would be exposed to too much risk.”
There were therefore no major liquidation instructions and the withdrawals could be orderly. Sygnia also only communicated its decision to close its funds to the market after the majority was completed.
The firm also ensured that it could offer an alternative. Since investors had been using hedge funds in their portfolios as defensive strategies that offer returns ahead of cash but with some capital protection, Sygnia made a decision to introduce a fund of structured products that could perform the same role.
“We’re in an environment where volatility is here to stay for the foreseeable future, so you want something in your portfolio that protects downside risk,” Wierzycka said. “I know structured products are an ugly word to some people and I spent the early years of my career fighting them, but they have come a long way.”
In the past, almost all structured products were highly opaque offerings that charged layers of fees and investors had little idea of how they worked. However, there is a new generation of products that have become far more transparent and more cost effective.
In simple terms, around 90% of an investment in this type of structured product will be placed in a low risk investment with a predictable return such as a money market fund or a bond. The remainder is used to buy a call option of the upside of the equity market, which is usually capped.
What that creates is a pay-off profile that offers complete capital protection, due to the bond or money market investment, but with the potential to earn some of the market return when equities go up, through the call option.
“For investors who do want downside protection we have launched a fund with monthly liquidity, and are building the structured products ourselves,” Wierzycka explained. “There are no hidden fees, no hidden charges, and we are completely explicit about how the products are structured. We can give people up to 15% market participation with complete downside protection for 40 basis points.”
For investors who use Sygnia’s skeleton UPF funds through its retirement annuity, their previous hedge fund exposure has also been transferred into this product.
“We always used hedge funds as an alternative to money market in our multi-asset funds,” said Wierzycka. “In the bull market it worked incredibly well for us. When you are getting 15% instead of 6% or 7% from the money market, even despite the fees, that’s a pretty good result. It was only when the markets turned that they started detracting from performance.”
However, Sygnia believes it is still important to have something to play this same role in these portfolios.
“We still believe in current market conditions that you can do better than cash,” said Wierzycka. “We have enough exposure to money market. We have down-weighted equities, down-weighted bonds, and maximised our offshore exposure, so there are not that many places to allocate money. We have therefore gradually allocated to structured products.”
Investors will also not pay any extra for this allocation.
“The value proposition is that, in the UPF funds, we don’t charge extra for any exposure to the structured products,” Wierzycka said. “Whatever management fee is quoted to investors, that covers the cost of those structured products as well.”
All retail investors invested directly in Sygnia’s funds of hedge funds that have not yet moved will also have the option to use this fund of structured products. Those who have not yet moved their money or have not yet been contacted will be contacted in the next few days.
“We have realised an error on our side [in] that we assumed that the only people in our funds of hedge funds had financial advisers,” Wierzycka said. “We contacted all the financial advisers with a note two months ago, but not direct investors. Any retail investors do however access these funds through an endowment policy and those stay in tact. They just have to switch to a fund of their choice. There will be no costs, and no tax implication.”