Sygnia CEO Magda Wierzycka certainly knows how to galvanise an audience, be they supporters or detractors.
For those who believe the hedge fund industry has been a money-making racket for its managers, and not its clients, her declaration last week that hedge funds would be off the Sygnia menu was applauded.
For the hedge fund managers who have consistently beaten the market, after fees, for a decade or more, it was part of a PR campaign designed to draw attention from Sygnia’s decision to replace its fund-of-hedge fund offerings with a fund of alternative investments, which will attract fairly high fees of its own.
Among others, this fund will consist of so-called "new age" funds such as fourth industrial revolution investments, technology funds to take advantage of the Faangs (Facebook, Amazon, Alibaba, Netflix and Apple) and a small allocation to cryptocurrencies and blockchain technology companies. Arguing that stock selection and long-short strategies employed by hedge fund managers had become an "irrelevant component of performance", Sygnia wrote that a market environment where "there are no clearly identifiable themes" had made stock-picking strategies "largely random" and had cost investors "predictable capital preservation". At the same time, Sygnia decried the "disproportionate" fees charged by hedge fund managers.
However, for individual investors who choose to invest in Sygnia’s fund of alternative investments on a stand-alone basis, the management fee remains 0.8% a year, with a performance fee of 15% "subject to a hurdle of CPI [consumer price index], scaled down for larger investments". This is similar to a typical hedge fund fee structure.
Wierzycka maintains her decision to axe hedge funds from her platforms "has cost us millions in fees we will no longer earn".
However, it seems as if Sygnia is simply replacing hedge funds with something new so that the fees they used to earn on hedge funds will be made up on its new offering.
36ONE Asset Management co-founder Steven Liptz’s biggest quibble, along with others in the industry, is Wierzycka’s blanket view of the fund managers as overpriced and underperforming.
Using data compiled by HedgeNews Africa, 79% of local hedge fund managers have outperformed the local market year to date, using the JSE’s shareholder weighted index, or Swix (representing the 40 largest stocks on the exchange, but including only local shareholders in the index), as a benchmark.
Using 36ONE as an example, the group’s equity long-short fund delivered a year to date return of 9.5%, against a 5% fall on the JSE’s all share index. Going back to the fund’s inception in 2006, the all share index would have given an annual compound return of close to 12%, while 36ONE has delivered in excess of 17% after fees.
Nonetheless, the accusation that hedge fund managers reap fat rewards in the good years and don’t give back in the bad is valid, says JustOneLap founder Simon Brown.
"In the good years, let’s say a fund delivers 10% and takes 3% fees, what happens the following year when they give you minus 5% and you’re sitting on a return that’s under the money market rate, and yet the fund manager is sitting with your performance fee?" he says.
But Liptz says fees are essential to outperformance. "We want to back ourselves and where we perform we want to charge fees and where we don’t, we’re not going to."
He is adamant that stock selection works. "Skilled managers will have the ability to outperform something which has no tool set. In other words a manager can choose not to be in Steinhoff just because it’s in the top 40. No matter what the environment, I think that’s better," says Liptz.