[TOP STORY] Hedge funds have generally outperformed traditional equity funds


SIMON BROWN: I’m chatting now with Nosibusiso Ngqondoyi, head of hedge funds at Old Mutual Multi-Managers. Nosibusiso, I appreciate the early morning. Hedge funds in South Africa have been around for what, over two decades, launching I suppose in the late nineties. In a note you put out, they do what they say on the sticker. One of the key things of hedge funds is an ability to be a long and short fund, and they have generally outperformed traditional equity funds.

NOSIBUSISO NGQONDOYI: Hi, Simon. Certainly, hedge funds are quite fascinating because we know that the traditional way of investing is really about buying shares or investments that you believe will go up over time, very importantly avoiding those shares that you believe will fall in price or in value.

And hedge funds are fascinating in that they can make money in a falling market by buying those very shares that you believe will fall in in future. Like you say, it’s a very different way of extracting alpha that is otherwise not available to long-only managers. Also, like you said, Simon, the hedge fund industry has been around for almost 30 years in South Africa and the managers in this space have successfully managed money over this period.

SIMON BROWN: My understanding of hedge funds is they should be fairly uncorrelated to other asset classes, which gives them a fairly compelling reason to put them in an overall individual’s portfolio.

NOSIBUSISO NGQONDOYI: Definitely. That uncorrelated part really comes from the fact that there are these additional tools that hedge fund managers have, like I said, that are not available to traditional managers, where you can short shares, you can actually buy shares that you believe are going to fall in price. And you use that money that you get from shorting to also amplify returns by investing in your high-conviction ideas or the stocks that you believe will increase in price. So essentially [you] use that money to fund those positions.

Effectively then you are able to benefit from the selling side of things and also using those proceeds to deploy or fund those other ideas.

SIMON BROWN: I hadn’t even thought of that. Do we have a sense of how big the industry is in terms of assets under management in South Africa?

NOSIBUSISO NGQONDOYI: It’s just sort of R90 billion in assets under management. It’s quite small in the bigger scheme of things if you compare it to the assets that are managed in the unit trust space in South Africa that are ……2:52. So it’s surprising that an asset class that has done so well has very little presence, especially in retail investor portfolios, given how well it’s done and given the diversification benefits that it potentially offers [one] to invest in.

SIMON BROWN: You make the point, R90 billion – it’s a lot of money to you and me but for the industry not so much. And certainly retail investors in the note you put out have very low exposure. I mean, 95% of investors are institutional investors. Retail investors seem to shy away from hedge funds.

NOSIBUSISO NGQONDOYI: Yes, Simon. I think it’s also got to do with the fact that people are generally not comfortable talking about hedge funds, given the bad reputation and based on incidents that have happened in offshore markets where you’ve had some hedge funds blow up in the past. We’ve not had any such experience locally in that the local hedge fund industry has always been managed in a conservative manner. This is even before the hedge fund regulations in South Africa were introduced. That is now a lot more [so] with the recent introduction – not so recent any more because it was in 2015 when the official hedge fund regulation was introduced in South Africa.

That basically means that your hedge funds are now regulated under FSCA [Financial Services Conduct Authority] ……4:29 and alongside all the other unit trust funds in South Africa. Therefore investors enjoy the same level of oversight in the hedge fund space [that] they do in any other unit trust that they invest in.

SIMON BROWN: Yes. Maybe that CIS……4:48 [Collective Investment Scheme?] is important and you make the point that we look at them separately but they’ve got the same level of regulation as active managers, as unit trusts, as passive, as ETFs, etc.

What about fees? One of the concerns, I suppose, around hedge funds is ‘they charge ridiculous fees’. You make the point that maybe, maybe not, but look at the returns after fees and make sure you’re happy with that.

NOSIBUSISO NGQONDOYI: Definitely. Fees are definitely an important part and, like you say, Simon, what we tend to advocate is to look at the returns after fees. But I also just want to make the point that the fees have actually generally come down in the hedge-fund industry from the levels that we charged historically. That is because as managers reached criticalness, in terms of the assets that they manage in the hedge-fund space, they ……5:40 to clients by lowering fees.

In our instance, being in the multi-manager space, you have a lot more assets and therefore have negotiating power. So we are able to further negotiate lower fees with managers. But, like you said, what is important is the outperformance that we have seen come through in hedge funds net of fees.

I just want to make an example and say over the past 10 years the median return of the SA long-short equity that’s a strategy within hedge funds has outperformed the SA equity market by more than 1%. So for every year hedge funds have generated an additional 1% return, and that is net of fees. That’s the median return, and that’s very important for me to mention.

I also feel, Simon, most investors have kind of lost faith in the asset class on the back of the rough patch that hedge funds experienced in 2016 and 2017. When you look at the 10-year period, the number that I’ve just quoted actually includes that period where hedge funds had relatively underperformed.

If you just look at the period since, that is post-2017, about five years to date, hedge funds have actually outperformed by 2% or more, net of fees. So they’ve definitely added in value, and investors that remained invested have definitely benefited from having the ……7:20 in their portfolios.

SIMON BROWN: Yes. And the key point is alpha. They are delivering what they promised in the sticker. They are bringing alpha to the party.

We’ll leave it there. I really appreciate the time, Nosibusiso Ngqondoyi, head of hedge funds at Old Mutual Multi-Managers.

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