17 July 2024
Old Mutual
Local investors who are concerned about how a market unfriendly government of national unity may adversely affect their investment portfolios are increasingly turning to the absolute return and downside protection promises of hedge funds.
This is the view of one of the country’s top recognised fund of hedge funds managers, Nosibusiso (Busi) Ngqondoyi. Busi manages the Old Mutual Multi-Managers Long Short Equity Fund of Hedge Funds, which boasts a 20 year track record and has recently won the title for the best fund of hedge funds over five years, at the 2023 Hedge News Africa Awards, having received similar awards for six consecutive years.
Hedge funds offer investors the unique advantage of being able to profit from both share price increases and share price declines, and thus make it possible for investors to make money in both rising and falling markets, providing a differentiated risk-reward profile compared to traditional unit trusts,” explains Ngqondoyi.
The country’s real GDP grew by just 0.6% in 2023, and the National Treasury has projected growth rates of 1.3% and 1.6% for 2024 and 2025, respectively. While the direction of travel is positive, low economic growth remains one of numerous factors contributing to constrained returns from the domestic equity market. These include election shocks, infrastructure-related challenges in logistics, transport, water, and electricity (although loadshedding has improved recently) as well as insufficient domestic exposure to important global themes, and higher-for-longer interest rates, among others.
“In the context of the current South African and global economic and political landscape, traditional investment managers are finding it challenging to deliver real returns; but hedge funds do not necessarily rely on strong economic growth to deliver returns,” Ngqondoyi says.
Investors can think of hedging as a risk management strategy or a form of insurance against the potential losses their investments might suffer during financial market declines. Hedging acts as a shock absorber to smooth the volatility of financial markets, which seldom move in a straight line. This smoothing function is useful during periods of heightened uncertainty, and quite relevant given the upcoming election and the uncertain economic outlook.
“Just like you buy car insurance to hedge your risk of getting into an accident and incurring financial losses, it is equally important to insure or hedge your wealth and investments against adverse market and economic events,” Ngqondoyi says.
Investors are turning more and more to hedge funds as market uncertainty persists. This is evidenced by the record R6.24 billion in investment inflows to the domestic hedge fund market in 2023, compared to R5.33bn net inflows in 2022.
According to the Association for Savings and Investments South Africa (ASISA), the SA hedge fund industry ended 2023 with R137.9 billion in assets under management across 213 local hedge funds. Around a third of this total is held in retail hedge funds, designed for individual investors.
“The introduction of the world first hedge fund regulations in 2015 means that South African hedge funds enjoy the same level of regulatory oversight and scrutiny as traditional unit trusts, opening this segment of the investment market to the general public,” Ngqondoyi says.
“It is also important for investors to let go of the misconception that hedge funds are high-risk alternatives to traditional unit trust funds, which has not been the case locally, and rather consider them as the useful portfolio diversifiers they are. Hedge funds reduce the overall volatility of an investment portfolio by smoothing out the ups and downs of market returns over time,” says Ngqondoyi.
Ngqondoyi further explains that accessing this exposure through a fund of hedge funds provides an added advantage of instant diversification across multiple hedge fund managers and investment strategies. This helps mitigate the risk associated with depending solely on a single hedge fund manager style, that may encounter challenges at any given time.
“Incorporating hedge fund exposure into an investment portfolio can offer layers of protection against market uncertainty and assist local investors in navigating the significant macroeconomic headwinds confronting South Africa Inc through to the country’s multi-decade momentous elections and beyond,” concludes Ngqondoyi.