Cy Jacobs. Picture Supplied
Cy Jacobs. Picture Supplied

Now, you’d think, is the moment for hedge funds to bask in market volatility. But the latest figures suggest few hedge funds scored from March’s historic sell-off, or April’s equally unprecedented rise. There are exceptions, like Peregrine and 36One Asset Management. We asked 36One CEO Cy Jacobs why the industry’s performance was so underwhelming.

CJ: Very few are running actual hedge funds. Most are running long-only funds with some shorts. You see what happens when you get smacked like that.

But in theory these are the perfect markets for hedge funds, right?

CJ: Really, it’s because when hedge funds started in the country in the early 2000s, there were so many opportunities in SA. There was high growth, there was no real credit in the market, we had this massive boom and you could invest in pretty much anything.

I think hedge funds took advantage of that and earned huge amounts of fees for actually a lot of beta. Beta is when the market runs, and you happen to be 60%-70% invested on a long basis, so the market picks up and you make a lot of money — that’s beta. But a hedge fund is meant to extract what they call pure alpha. So, for example, if I think Standard Bank is going to outperform Nedbank, and I go long one and short the other, it doesn’t matter if they both fall. If I’m long the one that falls 5% and I’m short the one that falls 20%, I make 15%. That 15% is pure alpha.

In SA the chance of us getting back to good growth is a thing of history. So instead of running a fund with a 60% net long position, you need to run it more market neutral. We have a lot of shorts, and our net long positions are only coming from things like Naspers or British American Tobacco. We don’t have any net long position in SA basically. We’re net short the banks and the retailers. And I think that was an obvious trade.

Is this underperformance a crisis for the whole industry?

CJ: Absolutely. The problem is, we rely on the same clients they rely on — no client wants to put money into one fund. So I lose money because the whole industry’s underperformed.

But hedge funds can be expensive too. Are the fees actually justified?

CJ: It’s justified if you can get the net return. So hedge funds do charge 20% performance fees above cash and if you want above-cash returns, we’re going to charge for it. And we trade a lot, so our trading costs are high. The advisers will say: "Your fees are 6%, so I’ve lost 6%." I’ll say: "No, you made 24% and the market was up 10%." They’ll say: "I should have made 30%." It doesn’t work like that: the fee has a high watermark and only accrues for outperformance, so would you rather underperform or pay a higher fee and outperform?

Would you argue that hedge funds must trade more?

CJ: Exactly. People will say "Your trading costs are more expensive than large institutions", and I’ll say: "Yes, why is that a problem?" We could trade; we’re small, we can take advantage of opportunities, and the result is that we beat them by 6% or 7%. I don’t get the benefit of the money — trading costs go to others, they’re payaways to make more money for the funds.

Is it interesting that there hasn’t been more shorting in SA hedge funds?

CJ: We are pretty aggressive [as 36One]. But the problem in SA is liquidity. Sometimes you cannot get scrip. And institutions — and they shouldn’t do it — but sometimes they realise there are shorts in a stock and they call their shorts back and then you’re forced to buy [the shares] back.

Do you agree that some of the recent gains we saw were simply due to a massive short squeeze?

CJ: There definitely was a bit of a short squeeze, and bear in mind that it’s not only the SA industry that’s playing here: there are a lot of international guys who think this country’s finished, so they are also active in these shares. [But] when there’s a bit of good news, people panic. In the US, we saw people start buying the biggest load of junk: airlines, hotel groups, casinos, Carnival [Cruise Lines].

Why has this happened?

CJ: In America, there’s been this Robinhood phenomenon: 10-year-olds who play Fortnite are learning to play the market and are trading online. Children and young adults have followed this Robinhood business [a commission-free online brokerage] and are buying rubbish. You are literally talking about millions of these types of traders and they all pursued the same things.

Is the opportunity from here on out on the short or the long side?

CJ: I think it’s both. I think there are great technology businesses globally and the SA rand hedges could do very well. The mines should survive; we’re also quite bullish on gold given massive global stimulus, which is unparalleled.

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