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Sunday August 07 2022
A Growing Pool

Financial Mail  November 20, 1998

by Sharon Wood


Coronation and BOE are setting the pace for alternative investments designed for the risk tolerant


      Two years ago SA investors wouldn't have known what a hedge fund was. Now they're springing up all over. Two institutions took the plunge into the industry earlier this year and other fund managers are testing out in-house hedge fund strategies before offering them to the public.


      The consumer is now ready for a product that offers something out of the ordinary because it beats the returns achieved by the more straightforward products such as unit trusts.


      Though sophisticated for an emerging market, there are inefficiencies in the SA markets that offer huge arbitrage opportunities between shares and the derivative markets. Special event arbitrage situations that occur when share prices are out of line ahead of a corporate merger are also attractive here. These situations rarely occur in more developed markets because the gaps are quickly removed by speculators.


      Coronation and the Board of Executors (BOE) were the leaders in the field when they launched their hedge funds earlier this year. Each adopted a different approach when they set up their funds. BOE registered its SA Omni Fund in the Bahamas and used Magnum Hedge Funds as a sponsor because it runs global hedge find-of-funds. Coronation listed an existing investment trust and closed access to the underlying hedge fund other than through buying its shares.


      The SA Omni Fund's performance has done well this year despite the turbulence that's dogged the market since May. The fund has delivered dollar returns of 131,4% to the end of October despite sliding back in August.


      The fund, which has R56m under management, is currently closed to new funds. But it may open soon because of the opportunities in the market, says BOE fund manager Kevin Cousins. He says that it's been an "exceptional" year for the fund. Most of the growth was made during the first half of the year when the fund took profits on many of the newly listed shares it took when they listed and built a cushion for the difficult times to come.


      Cousins explains: "It was a more attractive strategy than using the more mundane arbitrage strategies."


      When the market plummeted in August, SA Omni fund dollar returns were reduced to 120% by the end of that month.


      Its main investment strategies are to pursue convertible and event arbitrage opportunities - or to benefit from share prices that are out of line ahead of corporate mergers.


      High growth is unlikely to recur every year, stresses Cousins, who has set a target for the fund of between 20% and 25% dollar growth.


      Corohedge's performance has not been as strong. Initially the fund showed impressive growth. After listing in May, Corohedge -an investment trust that was set up in 1994 - saw its share price rise to a high of R26 in late July. During April and May the company realised R50m profits off its R850rn profit base. But the share price fell below the R20 mark when the financial markets slumped in August and retreated to a low of R10,40 in September, it now trades at R 12,70.


      Corohedge released its interim results during the first week of November.


      At the six-month mark, Corohedge MD James McWilliams was happy that the hedge fund's capital had been kept intact during turbulent times and reported a slight increase in its net asset value to R10,63 during the six months to end- September from R10,19 the previous in- terim period. He said the performance was good on a relative basis but not fantastic on an absolute basis.


      The fund has different strategies, which include short selling; long/short spreads and arbitrage, derivative and event-driven strategies. It can gear its position to three times the value of the fund. Corohedge is producing good absolute returns for the investor, McWilliams claims.


      Macrotrading is a core component of McWilliams's strategy. It means that the fund takes positions in the gilt market based on the major interest and currency trends. These positions are hedged out depending on the market conditions. He says that the fund takes longer-term views and does not get involved in intraday trades.


      He sees hedge fund management as an unconventional and a "far more practical way of managing money' and argues that it provides investors with better returns over the longer term. "The market's still in its early stages, but should become as active as overseas." In response to scepticism about whether listing is the right way to do it, McWilliams says he's happy with the product and wouldn't consider doing it any other way. By listing it raised capital and created a more transparent pricing mechanism for the fund, as prices move daily on the JSE.


      African Harvest Capital is also getting ready to offer its clients the option to invest in hedge funds or, as it prefers to call them, specialist funds. African Harvest Capital MD Ethan Dube explains: "It was never our intention to develop hedge funds in the US style. But you do get opportunities out there that are almost risk-free and which a typical fund manager would miss."


      In October, African Harvest Capital employed two former Southern Asset Management fund managers James Gubb and Frederick Bouchard to set up the "specialised" asset management section.


      Bouchard has strong quantitative skills and Gubb is strong on the dealing side.


      African Harvest Capital has set aside a small amount of capital for the two newcomers to manage and they have divided this into three funds that cover the risk spectrum from conservative to aggressive.


      One fund relies solely on long/short strategies and the other is a cash fund - a fund that exploits share price anomalies during corporate restructur-ing. The third uses leverage and long/short positions.


      Fund managers' remuneration levels are determined by the performance of the funds and in line with the rest of the group. Fund managers get a percentage of the profits after a portion has been distributed to the management company.


      African Harvest Capital gets the rest. Dube hopes to increase the funds devoted to specialised asset management if it delivers attractive returns and says "the idea is to develop a track record before getting third parties involved".


      Prodigy Asset Management also plans to get in on the hedge fund action. It wants to run an in-house hedge fund from early next year and will consider listing the fund after it has built up a track record. The fund would invest in international and local markets and would use long/short and leveraged bond positions to generate returns.


      He suggests institutions and wealthy private investors should invest 5%-10% of their portfolios into hedge fund-like vehicles.



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