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01 Aug 2017
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Dear Client

 

1.           One of our clients who has investments in both our Hedge Fund of funds and Unit Trust Fund of funds has noticed that over the last month the Unit Trust FoF has been making a comeback much faster than the Hedge FoF and let me know that he is considering withdrawing his hedge fund to rather invest somewhere else. I thought that some of our other hedge fund clients might feel the same and have personalised my answer to mentioned client for you:

 

2.           It would be unwise to withdraw your investment in the hedge funds after having waited so long for the funds to recover, now that it is starting to make its comeback, even though it is in fact true that Unit Trust are making a comeback faster than our South Africa Hedge funds and our offshore Moriah Global Fund of funds (a mix of offshore hedge and unit trust funds). One of the reasons for this is because the NAV of the underlying funds of the hedge funds are only calculated once a month, whereas unit trust funds are calculated daily.

 

3.           In the case of our Unit Trust FoF  we also have the maximum allowable exposure to offshore unit trust, locally regulated, as seen here:


4.           You will see above that Allan Gray Orbis is a good fund with a CAR (Cumulative Average Rate of Return since inception) of 17.94%. The STD (Standard deviation – a mathematical measure of volatility) is a bit high with 13.13%, however it is acceptable to us, as long as it is lower than the CAR.

 

5.           You will see that Old Mutual Global Equity, above, is an even better fund with a CAR of 23.57% and for the first two weeks of July have already done 2.7%. This is updated by Dries, of our offices, weekly on Fridays and I would be very surprised if it is not even better now, after 3 weeks.

 

6.           Momentum International has not made a comeback yet, however we are reasonably certain that it too will start to make a comeback very soon.

 

7.           Lastly you will see Sanlam India Opportunity, also above, which just for the first two weeks in July is already on a fantastic 4.92%!

 

8.           The above mentioned funds are Dollar denominated, so as to protect investors against a complete collapse of the Rand, however investors should know that when the Rand strengthens, as it has done over the past 2 weeks (with more than 1%) it has a direct impact on these Dollar denominated funds. In other words if we have showed the above figures in Dollar values, each fund above, Allan Grey, Old Mutual etc. would have shown at least 1% more. The expectation is that the underlying funds of the above offshore funds will grow regardless of any possible strengthening of the Rand. Our Unit trust FoF is looking good for July, however short-term volatility, like the current strengthening of the Rand, can still have a negative impact on July, but at least the indication for the next few months looks good.

 

9.       The rest of the underlying funds of our unit trust fund of funds, we consider the best in South Africa (see here and here). 


10.       Above, you will see that Anchor BCI Equity Fund, which for understandable reasons had a draw down of -9.53% during 2016, still has a CAR of 16.3% and is still coming back strongly already with 2.7% for only the first 2 weeks of July.

 

11.       You will see that all the above mentioned funds have a CAR (a long term average growth) of +/-15% and it is reasonable to expect that these funds under normal circumstances will make a comeback to that good growth of +/-15% per annum, but then you need to be patient and that goes for any growth fund.

 

WHY WE WONT JUST SWITCH THE HEDGE FUNDS TO UNIT TRUST

 

12.       In my experience, once Unit Trusts start to make a comeback, Hedge funds follow suite eventually. Because of the different hedge instruments, for example long and short options that only trade once a month, you can usually only start seeing what is happening after a month (except for hedge funds that trade weekly).

 

13.       You will notice that some of the outstanding underlying fund managers we make use of for our Unit Trust fund, like Laurium, also manage hedge funds (see Laurium Aggressive a long/short fund, in the table below). Laurium trades once a week and you will see that it is already on 0.5% for the first two weeks of July, but there is also something else you should look at, which would hopefully be a reminder why you aren’t just invested in unit trust funds and that is the CAR of 23.01% of the fund, with a relatively low STD of only 10.98%. Neither Laurium Unit trust nor one of the above mentioned underlying unit trust funds (except for Old Mutual Global) has a CAR as high. Only one of the few reasons why you should also be invested in hedge funds.

 

14.       It is frequently emphasised by economists that investors who are investing for the long term, should be diversified within unit trust funds and further diversified in various asset classes, for example, alternative assets (hedge funds), which not only performs better than Multi-asset (flexible) category unit trust, over the long term, but also do not correlate with the unit trust asset class.

 

15.       As mentioned previously, during 2008 the Multi-Asset/ Flexible category of unit trusts went down with more than 30%. We switched our Unit Trust FoF to cash and only had a drawdown of 10%, but that year our Hedge FoF grew with 9.8%. During 2013 hedge funds had a bad year while unit trusts had a good year. Investments in unit trust are also much more liquid. You can draw cash within T+2 (i.e. two days after the withdrawal instruction is sent, you should receive your cash).


16.       Here, you will see that all these hedge funds have a CAR of far more than 15%, Steyn Capital with 18.08%, Polar Star with 20.96% (for the first two weeks of July already on 1.67%), Fairtree with 20.12% and Select Opportunity with a healthy 32.15%.

 

17.       Here you will see a further two hedge funds, namely, Tower and 36One hedge funds.


18.       You will see, above, that Tower did very badly, for understandable reasons during 2016 with -13%, but what has been disappointing is that Tower has not made a comeback like the other hedge funds and they could not convince us that they would recover in the foreseeable future and therefore we have decided to remove them from our portfolio. They will most probably recover at some point, but we do not believe it is necessary to stay with them while we have enough other good funds that are already making a comeback.

 

19.       You will also see 36One Hedge fund above, which already shows 1% for the first two weeks in July.

 

20.       The results of the funds above take longer to show than in the case of unit trusts, as explained before and will only be seen +/- Two months from now.

 

21.       We still expect to see volatility, but we also see good signs of a comeback.

 

Friendly greetings,

 

Andre

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