The Blue Ink Composite (BIC), which tracks the performance of around 100 Hedge Funds in South Africa, reported a steady increase of 0.9% for the third quarter of 2011. The BIC outperformed the JSE All Share Total Return Index (ALSI) by more than 6%, which returned -5.39% over the same period.
According to Eben Karsten (pictured), portfolio manager at Blue Ink Investments, the third quarter of 2011 was another difficult quarter for the local equity market. “The Rand depreciated by as much as 13% as foreigners liquidated risk positions, in particular in equities. In US dollar terms, the ALSI was down more than 20% over the third quarter.”
He says that the ALSI recorded its third consecutive negative month in September, closing weaker by 3.16%. “In contrast, local hedge funds were able to protect investor capital in volatile markets and generate steady returns. Year-to-date the BIC is 5.58% higher, in comparison with the ALSI’s unimpressive 0.51% over the same period.”
Over the past three years the BIC has returned 33.64% versus 35.78% of the ALSI. However, the three-year volatility of the BIC is just 2.38% versus the 18.27% of the ALSI. Karsten says that high levels of volatility mean that equity investors who enter and exit the market at the wrong time can suffer extensive capital losses.
He believes that markets will continue to be characterised as extraordinarily volatile and investors will need to ask themselves whether the risk associated with a high weighting towards risky assets is justified. “There are enough commentators on both sides of the divide to suggest that no one really knows, however there is a strong argument for persisting with more conservative investment strategies as they offer positive real returns with much less risk.”
He says that Long-Short Conservative hedge funds recorded a 0.93% increase over the third quarter of 2011, while Long-Short Aggressive hedge funds recorded a 1.25% decrease. Fixed Income hedge funds on average gained 3.76% over the same period.
Karsten says that there is little room for complacency and investors concerned about downside risk are urged to diversify their portfolios to protect themselves in the event of further market stress. “There is a growing realisation that developed market economies are in the midst of a prolonged period of sluggish growth, supported only by low interest rates and quantitative easing, and that there still exists a number of varied risks that could cause equity market returns, in particular to be far less than what market participants expect.”
