Hedge funds could be missing out on asset diversification.
Hedge funds lack long-term returns that could prove diversification as managers highlight shorter-term performance.
Now, local hedge finds are slowly cleaning up their acts to be more appealing to the ordinary investors.
However, hedge funds still have a long way to go before financial advisors, and investment platforms make them readily accessible.
Hedge fund managers believe they are missing out on potentially better returns, which diversifying in the alternative assets class could offer.
According to Zeeman, among the hedge funds that retail investors could buy, 82% outperformed the JSE all share over the past two years. Only 45% of long-only funds achieved the same feat.
A new classification standard for SA hedge funds is underway.
When longer-term comparable return becomes available, Wilhelm Landman says investors will see that hedge funds, like other funds, have varied performance.
Wilhelm is a director at AIP Capital Management, which manages various retail hedge funds.
Asset class diversification
As evidence, 36One, which manages the retail equity hedge fund managed, returned 8.86% on average a year for the past three years since it became a retail investor hedge. The return is relative to the all-share index’s 7.06% return.
Wilhelm says if investors should compare their portfolio since late 2016 with precisely that same portfolio but with 10% allocated to a basket of divergent strategy hedge funds. They’ll probably find that their returns were enhanced, and their portfolio suffered smaller drawdowns through the period.
According to Eugene Visagie, most platforms can only accommodate funds that do daily and not monthly pricing.
He says more funds adopt daily pricing, and more will find their way on to platforms.
Eugene Visagie is a portfolio specialist at Morningstar.
Landman says many advisers don’t recommend hedge funds because they are not licensed to do so and don’t have experience working with these funds.
Visagie says the role of discretionary investment managers or multi-managers is crucial in blending hedge funds into a portfolio to reduce volatility and increase returns. Investors also need their expertise to understand the hedge funds’ diverse strategies.
Another reason investors and their advisers steer clear of hedge funds is their high fees.
Hedge funds have traditionally charged a high 2% annual fee with a hefty 20% performance fee on returns above what are often low hurdles such as the return on cash.
Fairtree’s Cornelius Zeeman says retail hedge funds look and feel like a traditional unit trust as they have daily pricing, daily liquidity, and low minimum investment thresholds.