Evolving client needs were the top priority for Cape Town-based fund-of-hedge-funds provider Edge Capital in creating its new strategy-related building-block portfolios, according to head of business development Pieter Davis.

Davis notes that the dedicated allocation to hedge funds allowed for under recent changes to Regulation 28 of South Africa’s Pension Fund Act has been optimistically received as a watershed moment for much-anticipated growth in industry assets.

“To clearly understand the industry’s future potential it is instructive to look at how product offerings have evolved based on the changing expectations of the current client base,” he says. “This can then be compared with where the future potential client base is likely to come from, and then one can critically analyse the minimum requirements of this potential client base given the competing options they have in the long-only or traditional space.”

According to Edge, the first fund-of-hedge-fund offerings available in the South African market initially tried to be all things to all people by combining as many strategies as possible into one product. As investors became more familiar with the role of individual strategies within these catch-all products, the next stage was to offer products developed along risk-profiling lines—namely low-risk, moderate and aggressive products. The major distinction between these products was the percentage allocation to individual strategies within each risk bucket, with higher market directionality evident in the aggressive products.

“However, the challenge for absolute-return investing has always been the ability to capture sufficient amounts of equity beta in strong up cycles,” says Davis. “And in the strong market recovery of 2009 and early 2010, most aggressive offerings did not participate to any significant extent.”

According to Davis, this has led to the current paradigm, where sophisticated institutional clients are looking for bespoke solutions structured to beat more clearly defined market-oriented benchmarks. This is combined with more fee sensitivity around performance relative to these benchmarks.

“The benefit of this is a clearer understanding of not only the realistic long-term objective but also the expected behaviour in specific market conditions,” says Davis. “It forces both investors and fund-of-fund managers to apply their minds as to the specific role hedge funds will play in the overall structure, and these more focused discussions allow for greater education and understanding by all concerned over time.”

Edge believes these recent product developments are positive for growth of the hedge fund asset class, and will allow the industry to capture its fair share of future retirement fund flows.

“A few of the very large pension funds, with assistance from their consultants, were early adopters of hedge funds,” says Davis. “But it is evident that the average retirement fund has virtually no exposure to alternative assets. We foresee a greater adoption of the asset class over the medium term, as these funds and trustees need further familiarity through education.”

“In addition, the foreseeable future will present a challenging investment environment with greater associated volatility and more muted returns. We believe this could be a good period for the merits of hedge funds to become apparent. Combining this with higher intensity, more dedicated new business initiatives and focused client education bodes well for elevated, sustainable flows into the industry over the next few years.”

Edge Capital believes that this positive outlook requires sensible growth and product management from all concerned, to ensure the continued entrenchment of historical success factors (including restrictions on the size of strategies and liquidity management) to deliver on promises made to investors.

“The approach to growth could have vastly different implications depending on whether the future is one dominated by an institutional or retail investor base, and of course the respective distribution channels that will be used as the regulations, pricing and liquidity requirements of bespoke institutional mandates are very different to the pooled, unit-trust retail structures,” he added.

Edge Capital’s new portfolio solutions, which launched in January this year, are focused on evolving client needs as part of its strategy of amending existing offerings into new, more appropriate solutions. The offering includes the Picador Aggressive Fixed Income Fund, the Picador Conservative Fixed Income Fund, the Torero Aggressive Equity Fund and the Red Rock Equity Alpha Fund.

According to Edge CIO Pieter Viljoen, these new portfolio solutions reflect the investment team’s highest conviction views on what it deems to be its Tier 1 managers. These views are executed at distinct strategy level to create clearly defined strategy blocks, which in turn allow these to be seamlessly combined into bespoke portfolios catering to specific client benchmarks of a market-related nature. Managers are selected from the original, broad set used in Edge’s existing risk-profiled products, but the process enforces the discipline of including only the team’s highest-conviction views in each distinct strategy block.

A move to broader liquidity terms and the increased use of segregated accounts are among other recent industry developments that require careful consideration, says Davis.

“Broad-based acceptance of such factors could impair the industry’s ability over the longer term to retain its unique characteristics and [to deliver on its] selling point of lower volatility through less correlated and better risk-adjusted returns which have historically set it apart.”

He notes that such a transition has occurred offshore in recent years, with less onerous liquidity terms corresponding with high asset growth. Such offshore hedge funds were wrapped into UCITS structures (similar to unit trusts in South Africa) and the outcome has been “disappointingly watered down returns”.

With the aim of protecting individual or retail investors, regulators applied existing UCITS criteria to hedge funds, forcing them into weekly or bi-monthly liquidity terms and restricting them to 2 X leverage. This limited the investment universe to liquid stocks, which if applied to South Africa would mean the top 40 stocks, and meant that the investment merits of less researched mid-cap stocks were ignored.

“Given that institutional investors dominate the South African hedge fund industry, it would seem imprudent to follow a route of daily or even bi-monthly liquidity terms with the consequence of more onerous investment restraints,” says Davis. “This will inevitably lead to disappointing investment outcomes which will not only erode confidence in the asset class but place severe pressure on the fee premium the class enjoys.”

“In summary, we believe the industry’s prospects look attractive given both the investment case and the ability to continually adapt and innovate in meeting client expectations,” says Davis. “The increased client opportunity set needs to be clearly understood and carefully managed to prevent a growth-at-all-costs mentality that will undermine the essential flexibility that leads to sustainable alpha and differentiation. This will most certainly dilute the “exclusive” tag of hedge funds to that of being merely another traditional offering.”

“An increased effort to educate existing and potential clients on the importance of these seemingly minor issues can go a long way in growing the industry sustainably and adding significant value to investment outcomes. Edge will certainly be looking to play a role in this process with the hope that all industry participants will contribute accordingly.”

Edge’s key concerns:
• Liquidity risk i.e. how will the potential growth in assets be dealt with when implementing complex, derivative-based strategies in both strong but also distressed market environments
•  What are the current terms of the majority of the investor base, because the South African investor base is predominantly an institutional base on, at best, monthly liquidity terms  
• The increased use of segregated mandates with the associated administrative burden on small, niche investment teams and the concommitent operational concerns. This will ultimately lead to higher costs for the investor
• The proliferation of large amounts of sub-optimal portfolios, which leads to higher total expense ratios and less transparency
• The loss of alignment of interest by no longer investing alongside the personal capital of the manager
• Having to share high conviction, limited alpha ideas across a range of products
• “Business creep” or expansion by some of the larger, established single hedge fund managers via multiple strategy offerings, which may lead to a shift in focus from managing money to managing people and business complexity.

Copyright HedgeNews Africa - November 2011

UK pension funds are taking more of an interest in hedge funds as a way to manage risk, according to a recent survey from Greenwich Associates based on interviews with 359 professionals at the country’s largest pension funds.

Faced with funding gaps, Britain’s corporate schemes are looking to increase their hedge fund allocations from 2.5% in 2010 to 3.1% in 2011, while they reduce allocations to domestic equities. Many local authority plans are also looking to add risk to their portfolios to increase returns.

The trend is similar in the US—where research from Pensions & Investments magazine, published in mid-November, shows that 2011 is shaping up to be the strongest for institutional investment into hedge funds since 2007.

Institutional investors—notably US public pension plans—accounted for US$39.9 billion in allocations (some already invested and including ongoing manager searches) as of early November. The year-to-date figure is 24% higher than the $32.2 billion of institutional activity in 2010.

Globally hedge fund performance has been muted in whipsawing market conditions, with third-quarter performance disappointing, prompting some recent outflows. But in general institutional allocators appear to be hanging in for longer-term benefits, the report found.

Pensions & Investments also notes that this year’s robust inflows are partly from first-time allocators—funds such as the $119.6 billion New York City Retirement Systems and the $7 billion Rhode Island Employees’ Retirement System have been educating their boards for years, yet have largely completed the investment of multibillion-dollar hedge fund portfolios in under a year.

In keeping with such global trends, the latest Investment and Consultant Outlook from data and research provider Preqin (based on a survey with 70 consultants at mid-year) shows that 41% expect to commit slightly more money to hedge funds by the middle of 2012 and 39% expect to slightly increase private equity allocations.

Such global statistics are interesting given that the majority of pension funds in South Africa and the broader African continent have yet to allocate to alternatives. They also confirm the need for ongoing education — a process that can take years.

For some in the South African market there is light at the end of the tunnel after a prolonged drought in new assets.

“We expect robust flows. Big pension funds are starting to ask the right questions now that the regulatory environment has woken people up,” one fund of hedge funds provider told us recently. “They are looking for diversification away from traditional assets towards new sources of alpha. If you can offer those solutions, you are in a good place.”

Others are less positive on the domestic environment, going so far as to suggest a “second wave” of withdrawals before new money is allocated, as pension funds realign their portfolios with revised regulation (a process that needs to be completed by year-end).

Whichever way it goes in the short term, there will be those who are well-positioned to benefit from major institutional inflows. With that will come a great deal of hard work and patience. The fact is it would be simply irresponsible of big allocators to make investments without a clear understanding of the asset classes involved and some serious strings attached in ongoing accountability and transparency and, of course, performance in line with objectives.

But with persistent uncertainty in the global markets, hedge funds and other alternatives are once again proving their place in the world. Such asset classes do, indeed, offer a measure of defence in uncertain times.

“Markets right now talk to the benefits of the alternative space,” one industry player told us recently. “Investors need to know what is the best form of defence. If you can protect against the downside, then the upside will take care of itself.”

This month we announce the first provisional nominations for the HedgeNews Africa Awards, based on data for the first 10 months of the year.  As the quality of these early nominations shows, there are managers in our universe offering exactly the kind of risk-reward characteristics that investors are searching for in these treacherous times.

Gwyneth Roberts
Editor

Copyright HedgeNews Africa - November 2011

Malungelo Zilimbola at Johannesburg-based Mazi Capital has achieved a strong five-year track record with his Mazi Visio Market Neutral Fund, which has gained an annualised net 17.43% since launch in November 2006, delivering a positive return each year.

The South African market-neutral strategy now has assets under management of more than R200 million and will soft-close at around R500 million.

Zilimbola says he has been in defensive mode with the fund all year, looking to take beta out of the portfolio with no major portfolio overhauls. The fund has been positive each month in 2011, recording a net gain of 8.91% by the end of October.

In comparison, markets have been extremely volatile with no clear trend, reacting to news flow rather than fundamentals.

“The world is in a very bad patch,” says Zilimbola. “There is high US unemployment, Europe is battling with sovereign debt woes and there are issues in China, with some very bad manufacturing numbers coming out. Emerging markets, especially China, are not likely to drive marginal global growth at the moment.”

Zilimbola is favouring defensive counters in current market conditions, such as South Africa’s second biggest hospital group Life Healthcare, where he expects strong domestic growth given the state of the country’s public-sector hospitals. The company has also recently announced plans to acquire 26% of India’s Max Healthcare Institute for about R850 million (US$107 million). This compares with far pricier offshore deals from both Mediclinic and Netcare, which have made developed market acquisitions in Switzerland and the UK respectively.

“Life Healthcare has started small in a developing market whereas other companies in the sector have paid huge prices to enter already developed markets,” he said.

Zilimbola has also recently acquired shares in Mpact, a packaging company unbundled from the Mondi Group. It trades at a slight discount to Nampak with the potential to unlock huge value. Telecommunications provider Vodacom also has defensive characteristics—despite limited growth prospects on the voice side it has been working hard on its data offerings, which should replenish declining voice earnings.

“Vodacom pays out 80% of its profits in dividends—with a dividend yield of 6-7%. That’s more than you will get from a bank,” says Zilimbola.

Zilimbola works with a strong investment team, relying on fundamental research and company visits to unearth value in the South African markets. Copyright HedgeNews Africa - November 2011

Paul Baise at Mianzo Asset Management in Cape Town now has a five-year track record with his Quantitative Tactical Asset Allocation Fund, a multi-strategy fund focused on the South African markets.

The fund has generated an annualised return of a net 16.22% since inception with the Johannesburg All-Share Index (ALSI) returning 6.7% annualised over the same period. It has been positive each year since inception, including a gain of 12.19% in 2008. In addition, the annualised risk of the fund is calculated at 7.1% whereas that of the ALSI is 18.5% and the All Bond Index (ALBI) is at 9.1%.

It relies on Baise’s proprietary quantitative models, which use non-linear adaptive regression techniques, incorporating artificial intelligence and neural networks. The strategy looks across all main asset classes in the South African market, including equities, fixed income and cash, investing only in listed securities.

The fund aims to offer higher returns than the ALSI or a balanced portfolio over the medium term, with risk equivalent to that of the ALBI. Performance has also been steady—its best month was a 9.17% gain in March 2007, and its worst a decline of 3% in September.

It currently comprises internal capital of R4.1 million and has significant capacity given the liquid assets it invests in. A capacity of R2 billion is achievable with the fund’s strategy.

Baise says the model has been stable since he first started trading it in May 2003, with asset allocations adjusting as market conditions have changed. He moved to a formal fund structure in 2006.

The fund added a net 4.34% in October, leaving it 1.75% higher year to date. It added a further 0.8% by late November.

Baise says current range-bound markets are a challenge, with the models picking up support for equities but the markets not responding accordingly in volatile conditions. The strategy is not actively traded, relying instead on medium-term views.

“The downside is limited with the fund, but so is the upside for now,” he said. “With markets so uncertain there is no harm in being cautious.”

The fund can use gearing of up to three times in either direction and is conservatively positioned at around 0.9 times in the current uncertain market environment. Despite the quant process, Baise can also apply a discretionary overlay, for example in sector asset allocation he may choose preference shares over fixed income if the potential returns are greater.

Baise has an MSc degree in Applied Maths and Computer Science, working previously at Sanlam as a quantitative analyst. At Mianzo, he has teamed up with long-time associate Luvo Tyandela, with the pair looking to build a boutique asset management business based on their quantitative asset allocation approach and their derivatives knowledge (see HedgeNews Africa October 2010). Copyright HedgeNews Africa - November 2011

Changes are under way at Cape Town-based PSG Absolute Investments, with PSGAI management buying out PSG’s interest in PSGAI as of November 1. The company is in the process of being renamed, and is expected to be known as Brunia Capital going forward.

During the past year PSG Asset Management has been consolidating its various asset management teams into a simplified structure with a comprehensive brand and investment philosophy.

“Certain of our hedge fund strategies do not quite fit into the new philosophy of PSG Asset Management,” noted Jean-Pierre Matthews, who heads up PSGAI. “This provided us with the opportunity to restructure our business in a very amicable way that suited all our stakeholders.”

Under the restructuring, Alastair Sellick and his South Easter team merge with PSG Asset Management and Sellick becomes Head of Fixed Income. Christopher Henderson and his back office team also move across to PSG Asset Management where he becomes Head of Operations. Henderson’s back office team will continue to provide settlement and reporting functions to PSGAI on an outsourced basis, while Matthews will remain a key individual of the South Easter Fund.

Matthews, Phillip van Blerk, Retief du Toit, David Venter and Steven Kukard buy out PSG’s remaining stake in PSGAI and will continue to focus on the management of the Brunia CTA and Black Swan funds – two unique offerings in the South African industry.

“Although the corporate structure has changed quite significantly, the operational and governance structure of PSGAI remains much the same,” said Matthews. “We are all very excited about the changes and we look forward to unveiling our new brand in the coming months.” Copyright HedgeNews Africa - November 2011

Mike Beamish and Greg Bergh at Praesidium Capital in Cape Town have closed their long-running South African long/short equity fund and will be taking “time out” from the fund management business.

The Praesidium SA Hedge Fund launched in 2003 and is one of the longest-running in the market, returning an annualised 16.12% since inception. It was 4.34% lower to this year to the end of September.

“The current choppy markets no longer suit our investment mandate. We get punished for tight risk management,” said Beamish, who spent six years at HSBC Securities before setting up Praesidium in 2003, where he was joined by Bergh in 2005, who was previously with Edge Capital. “I find it very difficult to sit before investors right now and promise them a 20% return per year. You need to have absolute conviction in investing.”

Beamish adds that there have been structural shifts in the markets since 2008, with an increase in high-frequency trading changing the picture for fundamental investors.

“I see only headwinds for the asset management industry, there are no tailwinds right now and I expect that to continue for the next few years. It is a good time to re-evaluate investment theories and practices. We will be back if and when we find something to be excited about,” he added.

The Praesidium team also offers two credit/mezzanine strategies, managed by St John Bungey and Roanna Verrinder. They focus on South Africa and the broader African markets, comprising around R350 million in assets under management. Copyright HedgeNews Africa - November 2011

African investment specialist Scipion Capital has expanded its team in Geneva and London in anticipation of new investment and product launches over the next six months.

Two new hires, Jonathan Hargreaves as analyst and Jean Cochard as office manager, are the latest additions to the firm’s London and Geneva offices respectively. These follow the recent appointment of Chris Jenkins to a revamped COO position, where he will be leading the marketing drive for the firm’s highly successful Commodities Trade Finance Fund. The fund, which finances soft and minerals commodity trading, recently celebrated its fourth anniversary and has generated positive returns in every month since inception.

In addition to the office expansion heralding a significant drive for new investment, Scipion is also preparing to launch a major new product. In anticipation of these developments, the new members of the team will be providing added support and expertise during an increasingly busy period for the company.

As analyst, Hargreaves will provide research and logistical support to the management team which oversees the firm’s range of equity and trade finance investment strategies. He will principally assist from a risk mitigation perspective on the firm’s flagship CTF fund, as well as researching new African investment themes for the fund to pursue.

A former political and security risk analyst, Hargreaves has travelled and worked in a number of eastern and southern African countries. Having originally built up financial services experience while working for an offshore trust company, he joins Scipion from IHS Jane’s, where he worked as a defence industry reporter and analyst.

Jean Cochard has joined Scipion to manage the Geneva office. Cochard first built up his financial background while working for Renault Finance as a junior dealer. More recently, he was chief supervisor of the back office and assisted the head accountant at Cosmorex Geneva, an international forex and precious metals broker.

Nicolas Clavel, Scipion’s CIO and founder, said: “The next six months are set to be something of a watershed for Scipion. With new products in the pipeline and an increased focus on driving investment into our funds, we are expecting to see a dramatic increase in activity and investor interest. With this in mind, we have moved to strengthen our team across both our offices. Jonathan and Jean represent the kind of hires that will not only help us manage this anticipated growth organically, but also play key roles in the long-term future of the firm.”  Copyright HedgeNews Africa - November 2011
 
 
 

Former top-rated Macquarie analyst David Pleming has joined Cape Town-based Tantalum Capital as of November 1.

Pleming is an investment industry stalwart, having been recognised as South Africa’s top-rated investment analyst in diversified mining research for more than a decade. He returns to the markets following a well-earned sabbatical, after having set up and led the top-rated mining research team at Macquarie First South Securities since mid-2006.

Pleming joins forces with Mike Lawrenson, Tantalum Capital’s existing resources and industrials specialist, to provide ongoing specialist mining and commodity research for Tantalum’s range of hedge funds. The pair have forged a strong relationship over many years, and will combine in a formidable team.

Tantalum Capital will imminently launch a global resources hedge fund, which will provide a dedicated specialist investment vehicle for the ideas generated by Pleming and Lawrenson.

Pleming has 16 years’ experience in stockbroking, having headed up the top-rated mining teams of Macquarie First South Securities, Nedcor Securities and Barnard Jacobs Mellet Securities respectively between 1998 and 2010. He held the position as the No.1 rated diversified mining analyst on the Johannesburg Stock Exchange for more than a decade and was also top-rated in coal, platinum and the smaller miners in the earlier part of his stockbroking career. Prior to this, Pleming worked for nine years at the Royal Dutch Shell group in the project evaluation/strategic planning function, culminating in a three-year stint in its UK-domiciled coal division in a senior project evaluation role. Before that, he headed up the strategic planning division for Shell’s coal and metals division in South Africa. A mining engineer, he has also added a BCom (Wits) and an MBA (UCT) to his academic achievements.

Established in 2005, Tantalum Capital has around R1.7 billion (US$220 million) under management with an investment team of eight specialist analysts and fund managers managing three hedge fund products. Copyright HedgeNews Africa - November 2011

* Read the full interview in the January print edition of HedgeNews Africa