Local hedge funds provide downside protection in volatile market
Volatility in the local markets remained high during July and the FTSE/JSE All Share Index lost 1.5%. It was also a difficult month for many of the 37 funds participating in the Nedgroup Hedge Fund Review, which lost, on average, 0.1% after fees during July, reports Lizelle Steyn, Manager: Alternative Investments at Nedgroup Investments. The bond market gained 0.7% during the month.
â€œThe best performing hedge fund category for the month was the long/short category, delivering 0.8% on average. Within this category the 36ONE Hedge Fund delivered the highest return for the month: 2.4%. The fixed interest category produced a return of 0.3%, the market neutral category a slightly negative return (-0.04%), while the trading category lost 1.1%, on average. Within the fixed interest category, market neutral and trading categories Coronationâ€™s Granite Fixed Income Fund (0.9%), the Fairtree Market Neutral Fund (2.9%) and the Gryphon Doulos Fund (2.0%) were the respective top performers.
â€œLooking at nominal returns over the longer term (two years), the funds participating in the Review delivered 24.9% p.a. on average, against the FTSE/JSE All Share Indexâ€™s 46.4% p.a. Over the same period the best performing fund was DWT Securitiesâ€™ Badger Quant Strategy Fund with a return of 54.2% p.a. Over one year the funds in the Review yielded 22.1% on average; over this period the Badger Quant Strategy Fund was also the best performer with a return of 63.3%. For the year to date, the funds submitting data to the Review returned 9.7%. Over this period the Top-Flite Eagle Fund delivered the highest return of 22.8%.â€ says Steyn.
Steyn points out that most hedge fund managers do not target the highest possible nominal returns, but rather the highest possible risk-adjusted returns. â€œLooking at the Sharpe and Sortino ratios for performance over the past two years, the Fairtree Market Neutral Fund offered the highest monthly returns for the accompanying volatility, whereas the Peregrine Pure Hedge Fund offered the highest returns for the accompanying downside volatility.â€
â€œThe Bond Exchange of SA (BESA) and Clade Investment Management (Clade) launched another South African hedge fund index during August. It includes 20 South African hedge funds and differs from the Nedgroup SA Hedge Fund Index in the following ways:
â€¢ Clade requires funds to manage at least R30m to qualify for inclusion; Nedgroup Investments sets its minimum at R1m (the same as the minimum required to register a conventional unit trust fund).
â€¢ Clade would normally include only funds that are administered by an independent, third-party administrator, whereas Nedgroup Investments has no specifications regarding fund administration.
â€¢ The Nedgroup SA Hedge Fund Index attempts to be as representative as possible and therefore also includes hedge funds which have been running for years and are now closed to new investments; Clade include only currently investable funds.
â€¢ Clade requires a performance history of at least 12 months for inclusion. Nedgroup Investments prefers funds to start submitting returns as soon as possible to minimise the self-selection bias of the index.
â€¢ Clade does not include registered CIS funds. Nedgroup Investments would include FSB registered funds, such as the Allan Gray Optimal Fund, which actively utilises derivatives to create significant short positions in the portfolio.
â€¢ Cladeâ€™s hedge fund index tracks the performance of funds back to March 2004; Nedgroup Investments tracks performance from January 2001.
â€¢ Clade only includes funds, which provide monthly liquidity to investors, whereas Nedgroup Investments does not have any restrictions around fund liquidity.
Steyn emphasized that the funds included in BESA and Cladeâ€™s index will always differ greatly from the funds included in the Nedgroup SA Hedge Fund Index, the greatest difference being that the Nedgroup SA Hedge Fund Index aims to be as representative as possible of the local hedge fund industry, whereas BESA and Cladeâ€™s index attempts to emulate the investable universe.
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