The results of the latest Blue Ink All South African Hedge Fund Composite (BIC), which tracks the performance of around 100 hedge funds in South Africa, reveals that Hedge Funds outperformed the All Share Index (ALSI) by almost 10% over a three-year period between 1 January 2008 and 31 December 2010. Investors who stuck with Hedge Funds earned total returns of 30.28% versus 20.60% from equities.
“The three-year total return from Hedge Funds illustrates the protection these funds offer during periods of stock market turmoil,” says Eben Karsten, portfolio manager at Blue Ink Investments. “This is largely because hedge fund managers have more room to manoeuvre than their ‘long only’ peers.”
The ALSI three-year return was weighed down by a 23.23% decline in local equities in 2008. “It’s exactly this kind of downside risk investors avoid by going the hedge fund route,” he says.
The Fixed Income category topped the 2010 Hedge Fund performance tables, with an average per-fund return of 21.10% (with volatility of just 3.20%) for the year. “Fixed interest strategies benefited from monetary accommodation – particularly the second round of quantitative easing – through 2010,” says Karsten.
He says managers in the Fixed Income space took full advantage of the fragile global economic recovery and low interest rates in the US. Karsten explains: “The large differential between interest rates in G10 countries versus those in emerging markets triggered a flood of foreign capital inflows to South Africa’s bond market – benefiting funds with fixed interest strategies.”
The BIC showed that local hedge funds returned 9.79% for 2010, compared to the 18.98% produced by the All Share Index (ALSI). The ALSI return was achieved with a volatility of 17.66% versus the 1.86% Hedge Fund average.
The main “drag” on overall Hedge Fund performance through 2010 was the disappointing one-year return generated by so-called Market Neutral strategies. Funds in this category returned an average 5.77%, even underperforming the cash rate of 6.92%. “Returns within this strategy remain varied due to foreign activity affecting relative pricing (spreads) between shares,” says Karsten.
The Long Short Equity funds category enjoyed a satisfactory 2010. The category consists of a Long Short Non-Directional category (average return of 12.91% for the year) and a Long Short Directional category (9.29%).