Hedge funds provide superior risk-return profile - 6 month Performance Review
Although the Nedgroup SA Hedge Fund Index delivered a return of 9.2% for the first half of 2006 against the FTSE/JSE All Share Indexâ€™s return of 18.8%, hedge funds still have superior capital protection traits over rolling 12 month periods, says Lizelle Steyn, Manager Alternative Investments at Nedgroup Investments.
She says while the greatest 12-month return delivered by the FTSE/JSE All Share Index over the past five years is 73.0% (the year to 30 April 2006), investors in this Index would have also lost 29.2% over the 12 months to 30 April 2003. By comparison, the South African hedge funds participating in the Nedgroup Hedge Fund Review, as a group, have never returned less than 14.5% over any 12-month period during the past five years, while returning as much as 39.3% during their best performing year. This is also superior to the rolling 12-month returns of the bond market, with its highest and lowest returns being 27.3% and 3.9% respectively.
â€œOver the longer term (through a bear and a bull phase in the equity market), hedge funds emerge as the asset class with a superior risk-return profile. Since inception (1 January 2001) the Nedgroup SA Hedge Fund Index delivered an annualised return of 23.1% p.a at a volatility of 6.9%. Over the same period the FTSE/JSE All Share Index generated returns of 22.8% p.a. at a volatility of 19.6%. The Nedgroup SA Hedge Fund Index displayed very little correlation with the FTSE/JSE All Share Index at +0.05%. The BESA All Bond Index return and the STeFI Interbank Call Rate for this period are 13.6% p.a. and 9.1% p.a. respectively, at annualised volatility levels of 6.9% and 0.7%. However, the outperformance of South African hedge funds defies the investment adage of higher risk delivering higher returns over the long run.â€
â€œAfter the historically lower volatility of the past two years, the South African equity market seems to be returning to the former higher levels of volatility. At one point during June the FTSE/JSE All Share Index lost nearly all of its 2006 growth, but rallied again to end the month 3.4% positive. However, on a sector level, a serious rotation from interest rate sensitive shares to rand hedges and Resources occurred, resulting in the Banking Index and Retail Index falling by 4% and 13% respectively. Not surprisingly, the bond market also reacted adversely to the largely unexpected interest rate hike at the June Monetary Policy Committee meeting and the now expected further interest rate increases following hawkish comments. As a result, the BESA All Bond Index lost 3.6% during the month.â€
Steyn expects the volatility of hedge funds to remain bond-like, but anticipates that the equity market will eventually outperform SA hedge funds as the track record of the Nedgroup SA Hedge Fund Index develops.
â€œWhat we do expect to remain the same, however, is the superior capital protection of hedge funds over periods as short as one year,â€ she says.
Steyn says the funds participating in the Nedgroup Hedge Fund Review delivered, on average, 0.3% net of fees, in June.
â€œThe best performing hedge fund category for the month was the trading category, delivering 2.2% on average. The fixed interest category produced a marginally positive return (0.04%), the market neutral category a slightly negative return (-0.03%), while the long/short equity category lost 0.6%, on average. â€œ concludes Steyn.
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