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Jan 2019
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Good News in the Case of Kanaan Hedge FoF

 

  1. The good news is that your funds in Kanaan Hedge FoF, nett of all fees, has grown with 0.73% for December 2018 and though the YTD for the year is -6.4%, it is still much better than the -11% of the JSE. It is of course not acceptable at all. Our intention with hedge funds, is not only that they go against the negative trend, but that they give strong absolute returns in and out of season.

 

  1. It is true that South African hedge funds have had a tough few years and have done worse than all the other fund categories, which puts them under tremendous pressure to make a comeback, which you should take into account. What is more important is that we have been identifying those funds in our portfolio, which have been performing against the general trend of South African hedge funds over the past few years and we are in the process of selling the losers.

 

  1. See below the performance record of the 5 hedge funds that have made the grade and which we have had for many years. Below you will see 36One, Steyn Capital and Fairtree Wild Fig, which have CARS (cumulative average rates of return) of more than 15% per annum. You will notice below that 36One, as well as Steyn Capital have excellent low volatility STD’s, relative to their high CAR’s, of only 8.6% and 6.7%. Under the column YTD, you will notice that these funds can do very well in a good year, for instance 36One during 2006 with 28%, during 2007 with 35%, -10% for 2008, which was excellent taking into account that the JSE crashed with -56% and during 2009 with 32%.

 

 

  1. Above you will notice that the 4.3% of 36One Ytd for 2018 is acceptable, taking into account that it did 12.44% under difficult market conditions for 2017. Same in the case of Steyn and we are happy with the 11% of Fairtree Wild Fig.

 

  1. Below you will see the Truffle and the Peregrine funds in which we invested 1 December 2017, because they grew excellently against the trend with Truffle 13.6% for 2016 and Peregrine 20.4%.

 

 

  1. Even better news is that I believe that we have found a very good trading fund, similar to that of the Badger Quant fund of Henk Grobler, namely Sanlam Alternative Gamma Fund, which ended 2018 with an excellent 15.5% for 2018! The fund manager came to see us about 2 years ago at our offices and though we were impressed with his investment strategy and process, we would not buy a fund, which only started July 2016. However, we have been following the performance of the fund diligently and you will notice, above, that for the last 6 difficult months of 2016, the fund did 3.13%. They have fine-tuned their trading methodology and for 2017 they did 4.6%, which is not as good as the Peregrine Capital fund, but you will notice that they have had only two negative months since they started to trade July 2016, with a low volatility STD of 2.6%, almost the same as an income fund! As you can see they have further fine-tuned their process and strategy for 2018, ending the year with 15.5%!

 

  1. What is very important to note is that it is a single manager macro opportunity fund, engaged in multiple asset classes, both locally and offshore. The investment style is that of a process-driven macro trading fund with a strong emphasis on absolute return with good liquidity and risk discipline. The fund has a dual mandate of both capital preservation and capital appreciation under all market conditions. Rigorous application of both the risk management and investment process is of paramount importance.

 

  1. Furthermore, the manager explained to us that the fund only engages in deep liquid markets, in order to apply the stop loss risk management process and for liquidity risk purposes. What was very important to us was that the fund has no directional or asset class bias and can take both, outright (O/R) and relative value (RV) positions. It is very seldom that you get hedge fund managers like Sanlam alternative gamma and Badger Quant that have not got bias (like for instance a long bias or a short bias), which makes it very difficult for them to perform when the market goes against their bias. His portfolio construction aims to balance the conflicting need for both concentration and diversification and we believe that now after almost 3 years of trading that he is busy proving himself accordingly.

 

  1. By the end of this month Kanaan Hedge FoF will have an exposure of 13.9% to this fund and hope to increase it to 18% next month. If the fund manager can maintain his performance of 2018, we will obviously increase our exposure, especially if the other 5 funds do not get in line with the type of performance of Sanlam alternative Gamma. Let me know what you think.

 

Friendly greetings

 

Andre

 

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