The latest Blue Ink All South African Hedge Fund Composite (BIC), which tracks the performance of around 100 hedge funds in South Africa, outperformed the All Share Index (ALSI) by more than 3% in July. This outperformance was achieved with significantly less volatility levels than the local equity market.
The BIC also showed returns of 2.11% during the first half of 2011, in comparison to the -0.61% the ALSI returned over the same period.
According to Eben Karsten (pictured), portfolio manager at Blue Ink Investments, the worst 12 month return an investor who invested in a local hedge fund would have earned over the past three years is just over 1%, compared to the -37.59% an investor could have lost if invested in the ALSI.”
He says that the extreme volatility levels of global stock markets recorded during the first half of 2011 have reiterated the need for investors to maintain exposure to strategies such as hedge funds and other alternative asset classes that offer a degree of protection in times of market turbulence.
He says that over the past three years, local hedge funds have on average also outperformed the ALSI by more than 10%, with only 2.58% volatility. This is in comparison to the 19.90% volatility recorded in the ALSI. “The three-year total return of 33.38% from local hedge funds illustrates the protection hedge funds offer during periods of stock market turmoil. It’s exactly this kind of downside risk investors avoid by going the hedge fund route.
Karsten says that the volatility in the equity markets at present means that investors who enter and exit the market at the wrong time run the risk of suffering extensive capital losses.
“The economic and financial outlook remains extremely complex and we expect the market to trade sideways due to the uncertainty around the impact of the sovereign debt issues in the European zone.”
He says that the hedge fund industry comprises of a variety of investment strategies that are commensurate with an investor’s preferred level of risk. “Some strategies are designed to be lower risk while others are more risky in nature. As a consequence of this, hedge funds are able to generate good returns without too much regard to market volatility.”