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What Sygnia’s hedge fund decision means for investors

What are they being offered as an alternative?

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.

Moving funds

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 alternative

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.”

RA investors

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.”

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‘’As trust in institutions erodes, the basic assumptions of fairness, shared values, and equal opportunity traditionally upheld by ‘the system’ are no longer taken for granted’’
Richard Edelman

“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. – Oh Really?

An ethical and transparent decision like this should be appreciated rather than scoffed at. Sygnia seems to lead the way in this regard. Good call Magda.

Thats one way of looking at it. Another way is to just to gain publicity for her new fund. You dont become one of the richest woman in South Africa by just helping out Joe public and it did take 13 years to have this so called Eureka moment. This doesn’t mention that Structured products are illiquid and this 100% guarantee is only as good as the ONE bank or underlying reference corporate that backs it. You are just swapping market to market risk for liquidity and most importantly credit risk. These notes often have 3 to 5 year lock-in periods unless you want to sell at deep discount. That 100% guarantee is not for free or just costing 40 bps. Good luck trying to get your money out when there is a run on the fund when a proper crisis hits and people just want cash.

So Sygnia shuts down the hedge funds and replaces them with structured products so that Sygnia captures the fees that were previously going to the hedge fund managers, but the media and uninformed public hail this as Magda doing the right thing?

Cut to the chase.

THEN: Sygnia ran hedge funds as the only way for them to make money for themselves with high fees given that they had low assets.

NOW: Sygnia has large assets and chooses to use ETFs and makes a lot of money with less work.

I recall when Magda use to “tease” ETFs service providers as just managing spreadsheets as opposed to them who were doing the hard work of analysing companies.

This is nothing but Magda being “over the moon” (read: arrogant/hubris) for having such large assets and also hoping that people (read: retail) will move to her company.

Agreed,structured products are an improvement over hedge funds, but still an expensive, opaque, inefficient way to manage risk in a long term portfolio. Long bonds is the optimal tool. How long will it take Sygnia to fess up to their latest mistake?

So Sygnia had Product A and lots of people bought it. It made them money so why should they stop selling it. Now they develop Product B, which not only saves the people money but still makes them money… and the people complain.

Now, who forced people at gunpoint to buy product A then or product B now? Hmmm, no one.

Of course they wanted to make money with Product A and now Product B again. It’s called doing BUSINESS.

People seem to forget this is a capitalist market and they can CHOOSE to not by Sygnia products or services if they don’t want to.

If you don’t like it go buy another firm’s products/services. EASY.

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