Equities outperform hedge funds, but at much higher volatilityâ€™
The 38 funds participating in the Nedgroup Hedge Fund Review gained, on average, 1.1% after fees during September, but the level of performance varied significantly across the different hedge fund categories, reports Lizelle Steyn, manager alternative investments at Nedgroup Investments and compiler of the Review.
â€œThe best performing hedge fund category for the month was the trading category, delivering 2.0% on average. Within this category the Badger Quant Strategy Fund delivered the highest return for the month: 5.6%. The funds in the long/short equity, fixed interest and market neutral categories on average achieved returns of 1.3%, 0.6% and 0.0% respectively.
â€œEnd of September coincides with the publication of the quarterly Nedgroup SA Hedge Fund Index figures. The Index delivered 12.0% for the year-to-date, against the FTSE/JSE All Share Indexâ€™s 26.3%. The BESA All Bond Index lost 0.1% during the first nine months of 2006.
Steyn says since inception (1 January 2001) the Nedgroup SA Hedge Fund Index delivered an annualised return of 22.5% p.a. at a volatility of 6.8%. Over the same period the FTSE/JSE All Share Index generated returns of 23.0% p.a. at a volatility of 19.2%. The Nedgroup SA Hedge Fund Index displayed very little correlation with the FTSE/JSE All Share Index at +0.06. The BESA All Bond Index return and the STeFI Interbank Call Rate for this period are 13.4% p.a. and 9.1% p.a. respectively, at annualised volatility levels of 6.8% and 0.7%.
â€œAt the end of the previous quarter we warned that the local hedge fundsâ€™ outperformance of equities defies the investment adage of higher risk delivering higher returns over the long run, as equities display much higher volatility than hedge funds.
â€œWell, for the first time since the publication of this Index, equities have outperformed the South African hedge fund industry over the total period for which we hold monthly returns. However, the nominal performance of South African hedge funds over this period is still unusually high when you view it in light of the volatility associated with the equity and hedge fund indices respectively. We expect the volatility of the Nedgroup SA Hedge Fund Index to remain bond-like, but anticipate that the extent of the out-performance of the equity market over hedge funds will increase with time.â€
Steyn concludes that what should remain unchanged is the superior capital protection of hedge funds over periods as short as one year. While the greatest 12-month loss experienced by investors in the FTSE/JSE All Share Index over the past six years is 29.2% (as illustrated in the accompanying graph), the South African hedge funds participating in this Index, as a group, have never returned less than 14.5% over any 12-month period during the past six years, while returning as much as 39.3% during their best performing year.
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