Has your portfolio evolved over time?

By Jacqueline Ronne, Business Development at 36ONE

Jacqueline Ronne

The global pandemic, record inflation and Russia’s invasion of Ukraine – the unprecedented volatility caused by these events has reaffirmed the need for a well-diversified portfolio that can manage these risks.

Diversification can be achieved with the addition of hedge funds, which typically have a low correlation with traditional asset classes (bonds, equities, cash). In addition to low correlation, hedge funds offer the added the benefit of delivering higher risk-adjusted returns with lower volatility. 

Unmasking typical hedge fund myths 

It is important to debunk some of the common misconceptions associated with hedge funds. These can often create resistance in making use of this asset class and investors missing out on an important addition to their investment portfolio.

  1. Too risky – South African-based hedge funds are, in fact, relatively conservative compared to international funds. Some hedge funds, such as those managed by 36ONE, have proven to be less risky than the general equity market.
  2. High minimum investment required and only suitable for high-net-worth individuals – There are two types of hedge funds: Qualified Investor Hedge Funds (QIHFs) and Retail Investor Hedge Funds (RHFs). RHFs are now available to the general public, with a minimum investment that can be as low as a R25 000 lump sum, depending on how an investor accesses the fund. 
  3. Not easily accessible – RHFs are priced daily, with daily liquidity. This makes them more readily accessible, either directly from the manager or via a variety of Linked Investment Service Providers (LISPs).Regulation 28 of the Pension Funds Act (Act 24 of 1956) was also amended to include hedge funds. Up to 10% of retirement contributions can now be allocated to hedge funds.
  4. Non-regulated – The Financial Services Conduct Authority (FSCA) has included hedge funds in the Collective Investment Schemes Control Act (CISCA). This is the same act that governs unit trust funds. 

Outperformance during different market conditions

Hedge funds aim to deliver positive returns in both bull and bear markets and are therefore not dependent on overall market sentiment. This is extremely beneficial, as hedge funds can benefit from rising markets and protect capital in falling markets. By short selling, hedge funds have added benefit of being able to make profit on companies that they believe will decrease in value. A traditional long only unit trust is unable to employ this strategy and take advantage of this opportunity.

This risk-mitigation strategy also provides a hedge fund manager with an additional universe of companies for potential investment. This unique feature gives the manager added optionality of protecting assets and delivering positive returns, irrespective of market direction.

More rewards than risks

Hedge funds have been unfairly labelled as a far riskier asset class. In fact, they have more tools to manage risk. That being said, not all hedge fund managers are created equal. One should always consider the track record of the fund manager responsible for managing the hedge fund. 

Hedge fund managers can manage risks within a portfolio in various ways: 

  • Diversify their short book and prudently size short positions – assisting to protect against certain market shocks that we seem to be experiencing all too often lately.
  • A flexible approach with nimbleness to move in and out of shares quickly and when necessary, while ensuring the manager has sound principles to follow as a team. 
  • Adjusting net and gross exposure to mitigate risk in response to market conditions. A fund with a lower net exposure typically carries less risk.
  • Make use of leverage and short selling to earn returns that are uncorrelated with other asset classes.
  • Lastly, having the ability to diversify the portfolio geographically – investing both locally and offshore.

36ONE has a proven track record of managing hedge funds for over 16 years. 

The 36ONE SNN QI Hedge Fund (36ONE Hedge Fund) has returned an average of 16% p.a. net of fees since its inception. It has delivered this return with half the volatility of the market – the annualised volatility of the 36ONE Hedge Fund is 8.5%, which is almost half that of the market of 16.1%.*

The alliance of lower risk and better returns bodes well for a Living Annuity client. The client naturally experiences less sequence of return risk while drawing a monthly income without sacrificing the potential for higher returns.

All the above-mentioned rewards of investing in a hedge fund can give the portfolio both the ability and flexibility to provide better protection on the downside, while capturing performance on the upside. This ability to take advantage of different market conditions in their entirety can be extremely rewarding for an investor.

*36ONE SNN QI Hedge Fund inception date is April 2006. Volatility is measured by the standard deviation. The market is measured by FTSE/JSE All Share Index. Data from fund inception in April 2006 to end-February 2022.

Disclaimer: Collective Investment Schemes are generally medium to long-term investments. Past performance is not necessarily a guide to future performance. Portfolio(s) may be closed to new investors in order to enable the Manager to manage it more efficiently in accordance with its mandate. The Sanne Management Company (RF)(Pty) Ltd (“Manager “) retains full legal responsibility for the portfolio. The Manager is registered and approved by the Financial Sector Conduct Authority (“FSCA”) under CISCA. 36ONE Asset Management (Pty) Ltd (FSP No 19107), is authorised under the Financial Advisory and Intermediary Services Act 37 of 2002 to provide investment management services. Full details and basis of the awards are available from the Manager.

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