South African hedge funds outperformed the JSE All Share Index (ALSI) in August, a month characterised by high levels of volatility in local equity markets.
According to Eben Karsten (pictured), portfolio manager at Blue Ink Investments, while the ALSI closed August weaker by 0.3%, this performance hides considerable volatility during the month, with the ALSI recovering from a 9% decline in the first week of the month.
In contrast, hedge funds continued to perform strongly, with the Blue Ink Hedge Fund Composite which tracks the performance of around 100 single strategy hedge funds in South Africa, gaining 0.91% over August.
According to Karsten, hedge funds have outperformed the ALSI by more than 5% in 2011 so far, with a return of 4.89%. “This outperformance was achieved with significantly less volatility levels than the local equity market.
“Investors need to align themselves with the prevailing risk/return profile of the market as there will be many attractive periods in which to accept market risk," he says. "However, there are no immediate or apparent answers to the many headwinds facing the global economy, therefore highlighting the need for investors to ensure diversity in their portfolios.”
Fixed Income hedge funds on average returned 2.55% in August as expectations for monetary policy shifted from rate hikes over the next 3 Monetary Policy Committee meetings, to rate cuts. Long Short Directional hedge funds on average lost 0.69%, while Long Short Non-Directional hedge funds gained 1.10% over August.
The BIC also outperformed the ALSI by more than 10% over a three-year period. Investors who stuck with Hedge Funds earned total returns of 32.51% versus 21.65% from equities. The volatility levels of hedge funds over three years is also significantly less for investors. The ALSI recorded levels of 19.91% over the three year period, 17% more than South African hedge funds.”
Karsten says that 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 1.07%, compared to the 37.59% an investor could have lost if invested in the ALSI.