In volatile times, when investors are not achieving returns out of traditional asset classes, hedge funds can be a great diversifier. While there has been a wide dispersion of returns in individual hedge funds, many performed extremely well in 2019. The new ASISA Hedge Fund Classification Standard comes into effect on 1 January 2020, with the aim of classifying all hedge fund portfolios, including hedge fund of fund portfolios, into different categories. The aim is to make it easier for investors to assess and compare funds and to select hedge funds appropriate for their risk profiles and investment portfolios.
What makes hedge funds different from traditional investing?
- Long-only fund managers analyse stocks, make decisions to buy, sell or hold
- Hedge fund managers need to be able to do this well – and more. Hedge fund managers have a lot more tools in their toolbox. Hedge funds can use leverage, and other strategies such as shorting, which allows them to generate returns from both a positive and a negative view
- Managing hedge funds can be more complex than long-only funds, and so requires a different skillset
- Most hedge fund managers in SA have skin in the game and are prepared to invest a large proportion of their investable assets in their own funds.
What are the benefits of investing in hedge funds?
- Equity-like returns (after fees) with lower risk
- Protection of capital
- More investment options via a larger ‘toolbox’
- Diversification: better risk-adjusted returns Highly regulated environment
- SA has quality managers with long, consistent track records
- Complement rather than replace long-only funds.
Are hedge funds a high-risk investmentTo label all hedge funds (and hedge fund managers) as high risk is misleading. The risk profile of a particular hedge fund depends on the mandate of that fund. Some mandates may be very aggressive, using leveraged positions, while others may be designed to focus on hedging and delivering low volatility returns. There are hedge fund mandates to accommodate a range of risk appetites.
What are the risksHedge funds are obviously not without risk, as history internationally has shown. Fortunately, hedge fund managers in SA have proven themselves to be more conservative than their international counterparts – there are some experienced managers that have long, consistent track records to prove it. Furthermore, hedge funds are now much more transparent and highly regulated by the FSCA
- Short positions increase more than long positions
- Leverage can amplify the loss (and gains)
- Liquidity in short positions is key
- Choose a manager that has a solid track record and robust investment risk management.