Invariably, the mention of hedge funds brings a sour taste to the mouths of many. Most struggle to grasp exactly what a hedge fund is, and even fewer can articulate its value.
Moreover, the apparent absence of a universally agreed and standard definition presents an almost superficial barrier to investing in these strategies. How do I trust something that can’t even seem to define itself?
Prior to recent regulatory developments, the worst thing about hedge funds has been the name itself, “hedge funds”. The high-profile, headline-grabbing scandals that have previously plagued the industry are unfortunately often the first thing that come to mind upon hearing the name. Taking things further, the commonly referenced “hedge funds are an off-benchmark portfolio call” introduces anxieties about returns. Not only that, but you may also be left worrying about reputational risks should things go awry.
The list seems daunting, ultimately leaving investors hesitant and mostly confused about the potential value that can be unlocked through investing in hedge funds.
So why bother?
Hedge funds are the next iteration to the evolution of savings
We’ve seen the world of investments continuously evolve in perceived value and form.
The origins of investing can arguably be traced back to the 1700’s where Dutch merchants first began pooling capital, to access a wider and diversified opportunity set to reduce investment risk and grow wealth, thereby attracting an increased number of investors with modest capital.
Since then the benefits of pooled investment vehicles have been applied in various ways to create many flexible investment propositions for the savvy investor. Mutual funds, pension funds and unit trusts all come to mind.
What is consistent is that there have been periods in history when investors were more worried about losing money than they were about making it. Today we find ourselves at a time where both requirements compete for the same attention. Most hedge funds respond well to this through their ability to add value both when risk is rewarded and when it is penalised.
The Regulator has stepped in, turning the hedge fund industry inside out
On 1 April 2015, National Treasury declared hedge fund investments to be collective investment schemes, and to be regulated under CISCA (Collective Investment Schemes Control Act) as with other unit trust portfolios. It is now recognised that hedge funds have a rightful place within the investment space for both qualified and retail investors, in the form of collective investment schemes, while still being regulated by the Financial Services Board.
If all else is forgotten remember this:
Hedge funds are part of Investment 101 – They offer the ability to grow wealth when risk is rewarded and protect it when risk is penalised.
The degrees of freedom are essential – Hedge Fund managers are not pursuing this risk and reward objective with one hand tied behind their back. The ability to responsibly borrow and lend opens up the potential to benefit from both upward and downward trending markets. The trend is key. Sudden turning points in the market present challenges for all investment strategies, including the ones we’ve come to know.
Uniquely different but complementary return signatures – The greater freedom conveys the benefits of lower correlation and risk mitigation within your portfolio. This along with the differently timed returns reduces the drawdowns your portfolio could potentially experience in market crashes.
Hedge Funds in South Africa are now well regulated.
All things considered, the stock markets wait for no man. They will continue to evolve, rewarding the investor who will similarly evolve their mind-sets and investment strategies alongside it.
In this case the worst thing about hedge funds is truly only the name itself.