Why you should have more hedge fund exposure in your investment portfolio.

Why you should have more hedge fund exposure in your investment portfolio.

Amplify is one of the many good qualities of hedge fund managers in SA. I spent some time with them and other managers at a hedge fund workshop this week and want to share the highlights with you here.

We have been incorporating retail hedge funds into our clients' portfolios for the last three years, and it has benefited them tremendously.

Why you should have more hedge fund exposure in your investment portfolio.

1. It diversifies your risk

2. It enhances your returns

3. It Mitigates Sequence Risk – Perfect if you have a Living Annuity

4. For those of you who want to take a bit more risk and beat the market by 10% pa, it’s possible.

Here are some myths about Hedge Funds that you might have in mind, which we’ve busted. I’d be happy to have a conversation with you about them:

Hedge Funds are well-regulated in SA

If you would like to have more information about hedge funds, please feel free to contact me.

Innovations and Evolutions in the Fund Management Industry

Earlier this week, I met with Zara Azad, Investment Director at Jupiter, who manages the Old Mutual Global Equity Fund.     

This fund is held by many of our clients, either directly through this fund, or via its inclusion in approximately 14% of our offshore allocations in our discretionary managed PWM solutions, and 7% in our discretionary managed SIS solutions.

The Old Mutual Global Equity Fund is a longstanding, award-winning offshore fund with a strong track record of delivering alpha or outperformance relative to the regular markets. Invested in many leading global companies on a risk-adjusted basis within the offshore shares space, the fund is managed, taking far less investment risk than the open global share market (Sharpe ratio 0,34).

I enclose the latest quarterly fund fact sheet, covering the period from the end of December, as per the 1st attachment. Additionally, I have included the offshore fund fact sheet, as per the 2nd attachment, for the direct offshore version of the fund. This version is easier to view in terms of underlying performance, presented in the offshore base currency, and is stated in USD.

This direct offshore fund is the very same fund as the Rand feeder version of the fund – that is called the Old Mutual Global Equity Fund (i.e. the two fund fact sheets attached are for the very same fund, the first being expressed in Rands, and the second in USD terms where the fund is called the Jupiter Merian World Equity Fund).

Always using a systematic and quantitative-based approach, they have recently introduced two new dynamics that I found rather interesting and which I thought is of interest.

Looking at the background of the Old Mutual Global Equity Fund, my comment in the rounded explanation of the fund is that this is one of the most sophisticated funds in the world, focusing on a practical universe of 6,000 international shares and making sense of these in a meaningful manner to make investment decisions.

The fund ranks in the top 3% over 3 and 5 years out of 491 funds in SA over 3 years and 366 funds over 5 years. The fund in offshore terms has gained 75,3% in USD terms over the last 5 years, compared to the benchmark world index plus dividends re-invested, returning 69,8% over the same corresponding period.

Value Vs Growth Vs Momentum Investment Style

The fund has mostly been called a value-style fund in the past, but it moves between growth and value styles as market conditions dictate.    

During different market cycles, the various styles have fared differently at times over the last two decades

This highlights the importance of being able to be flexible to these different investment styles through the market cycle.  

Stock Selection Criteria

Highlighting the high-level detail around stock selection in this fund, which includes various systematic criteria, including AI-driven processes;    

Commonly, they referred to this as their “glass box” – meaning that the combination of all the elements is put together in a transparent manner.    

Practically, this culminates in the model weightings, which are adjusted over time, summarised as;  

The systematic approach is always in place, and various further enhancements over the last few years are shown as:

1. Extended Resources

A recent and rather interesting highlight in further innovation, I thought, was introducing various academics that the fund team has contracted to use on an ad-hoc basis.

These specialists, in their respective fields, can be used at any time. The fund team can refer a specific piece of work if desired, or simply their top independent expert advice can be obtained where market conditions dictate;

This provides them with much-needed, quick expert insights to tap into when needed, or where longer-term research is specifically required.   

I do believe this simple additional approach could well be a forerunner example for the rest of the asset management industry to embrace in time.   

2. Patent Data Intervention as Part of “Company Management”

Under the heading of “Company Management” as the 3rd pillar in stock selection above, a further evolution of the model’s company management stock selection criteria is the addition of patent data.

Patents give the legal right to use an invention.  Their patents signal, introduced in November last year, enables the team to identify companies that operate with high innovational efficiency based on their ability to translate a project into potential future earnings through the use of patents.

Simply stated, the other way around, if a company is spending large sums of money on research and development and operates in a patent-friendly industry, if there aren’t many new patents coming through, one should question their research and development spend.

Where it is strong, this, in turn, could identify future increased revenue streams. This certainly isn’t a leading component of “Company Management” - but merely an additional cog introduced within this greater framework.  I think it raises the right questions, either way, for companies in industries that use patents.        

I have the full slide pack used to present to me, which is available on request. If you wish to receive this (5mb large), then simply let me know and I will forward this to you.   

Sharing these further innovations in the fund management industry that we see coming through.

FRIDAY FOOD FOR THOUGHT