Local hedge funds account for less than 1% of the total assets under management in the country, and have been criticised for their opaque investment strategies and high-performance fees. Yet, the asset class remains a key part of a well-diversified portfolio, and recent developments might make it the perfect time to get exposure to it.
It's been a difficult few years for South African investors, who had become accustomed to lucrative returns on their portfolios. Frankly, investors have not been rewarded for taking on the risk of equity or property, left perplexed by a low growth environment.
Diversification away from equity markets provides risk buffers in the form of uncorrelated investments which can outperform when equity markets do not. And that is where hedge funds come into play.
According to analysis firm RisCura, the broader South African equity market was down in 2018 by -14% with a volatility of 12%. On average, the dominant form of South African hedge fund strategy -- named the long-short strategy -- outperformed the markets significantly, returning marginally positive returns, though with a wide range of volatilities.
"Only looking at return numbers, without understanding volatility and gross exposure is therefore far too simplistic and results...