High levels of volatility in local and global equity markets that have continued into the fourth quarter of 2011 as a result of the European debt crisis, have once again highlighted the diversification benefits that local hedge funds can bring to an investment portfolio. According to Eben Karsten (pictured), portfolio manager at Blue Ink Investments, while the ALSI outperformed local hedge funds in October, it was a rollercoaster ride for investors, with the month commencing at near panic levels as the market capitulated on the deepening Eurozone crisis fears.
The Blue Ink Composite (BIC), which tracks the performance of around 100 Hedge Funds in South Africa, shows that hedge funds have outperformed the ALSI by more than 3% in 2011 so far, and by nearly 7% in the third quarter. “This outperformance was achieved with significantly less volatility levels than the local equity market,” says Karsten.
He says that Long-Short Aggressive and Long-Shot Conservative hedge funds performed strongly in October, returning on average 3.32% and 1.89% respectively. On average, Long Short Aggressive and Long Short Conservative hedge funds outperformed the ALSI for the 10 months ending in October, returning 6.50% and 7.50%. The ALSI returned 3.97% over the same period and Market Neutral funds returned on average 0.81% for October.
“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. 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.”
Notwithstanding the volatility observed in equity markets, hedge funds have managed to protect investor capital in volatile markets, says Karsten. “The All Bond Index gained 2.75% as foreigners continue to buy local bonds and to bid yields lower. Fixed Income hedge funds on average gained 2.11% in October, year-to-date these funds have gained 10.03%, well ahead of bonds which have returned 7.83%.”
Karsten says that the economic and financial outlook remains extremely complex and markets are likely to trade sideways due to the uncertainty stemming from the sovereign debt issues in Europe. “The hedge fund industry comprises of a variety of investment strategies that are commensurate with an investor’s preferred level of risk and as a result of this, hedge funds are able to generate good returns without too much regard to market volatility. Investors would bode well to remain conservatively invested and to maintain exposure to strategies that offer investors a certain degree of protection in periods of market uncertainty,” he concludes.