Following the Smart Money

At $39 billion, the Harvard Endowment Fund is the largest higher education fund in the world. Over the last two years, the fund has doubled its investments in hedge funds, which now represent a third of its assets. While hedge fund exposure of other US endowments is not this high, it still represents a significant portion of the overall endowments. Percentage invested in hedge funds as follows:

Despite South African hedge fund managers producing excellent risk adjusted returns over the long term, the hedge fund industry in South Africa remains small (estimated R40bn) relative to CIS industry assets of R2.4 trillion as at end March 2019. After a tough few years for hedge funds, with assets declining in 2017 and 2018, we believe that investors lost their faith at precisely the wrong time. Last year, the All Share Index was down -8.5%, while the HedgeNews Africa South African Single-Manager Composite was up 5.2% after fees. Hedge funds continue to fare well into 2019. There is a misconception that hedge funds are risky investments, when in fact South Africa hedge fund managers are relatively conservative, constraining downside performance and reducing volatility.

Most assets in the hedge fund industry are held in funds with a select few managers who have track records of more than 10 years. These assets originate from a select group of pension funds and high net worth individuals. Flows up until now from retail investors directly and via advisors has been negligible. This is despite hedge funds being available to the public, post regulation by the FSCA under CISCA. We suspect this may be due to the funds not being available to retail investors via LISPs which are the primary channels used by financial advisors, and also due to the fact that financial advisors and investors alike do not have a good enough understanding of their benefits to be able to invest with confidence.

Some hedge fund managers, like Laurium Capital, have moved their hedge funds from monthly pricing and dealing to daily pricing and dealing, which means that they can now be added onto LISP platforms and included in model portfolios etc. The industry still needs a hedge fund classification framework, which will assist adding the funds onto platforms, and help advisors and investors to better understand the investment strategy of the manager and fund.

Hedge Funds offer managers an unconstrained way to manage money, have a high degree of flexibility and don’t impose limitations that long-only funds may have, like tracking indices. The flexibility of hedge funds doesn’t only come from the strategies used – it is also inherent in the relatively smaller size of hedge funds. Smaller funds have the ability to be nimble, react faster to information, and take more meaningful positions in mid and small cap stocks.

One of the major reasons to have hedge funds as an investment is for downside protection and diversification. At least 15-20% of an investor’s portfolio should be invested in assets that are non-correlated to traditional investments, which makes hedge funds a key part of any well-diversified portfolio.

Murray Winckler, Co-Founder and Portfolio Manager

Laurium Capital, July 2019

Speaker at the Annual GIB Investment Summit 2019