Hedging your bets
Hedge funds are a good way to diversify your risk, writes Johann Barnard
An investment portfolio’s ability to produce above-market returns is always due to a combination of factors. For advocates of hedge funds, the promise is generally for returns counter to market conditions.
This is obviously a simplification of complex strategies that fund managers employ to deliver returns based on their convictions about different sectors, asset classes and individual counters. Their big selling point, however, is the promise of superior returns compared to the rest of the market.
This promise does come with an important caveat — particularly for investors who could be classified as retail. And that is that hedge funds certainly offer a proven method of risk diversification, which should always be employed within the context of a broader portfolio of other diverse assets.
"The only free lunch in investing is diversification," says Peter Urbani, of Sanlam’s hedge fund business, Blue Ink Investments. "Where they come into their own is as an alternative source of alpha. However you view what they’re doing, in an ideal world they provide you with a diversification benefit." He cites the 2008 financial crisis that sparked a 50% collapse of equity markets, whereas hedge funds were down by an almost-palatable 20%. The relative performance of hedge funds in extreme crises is often given as justification for their existence. But figures provided by Urbani for Blue Ink’s composite hedge fund index over the past three years to end-April show that a hedge fund does...
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.
Subscribe now to unlock this article.
Support BusinessLIVE’s award-winning journalism for R129 per month (digital access only).
There’s never been a more important time to support independent journalism in SA. Our subscription packages now offer an ad-free experience for readers.
Cancel anytime.
Questions? Email helpdesk@businesslive.co.za or call 0860 52 52 00. Got a subscription voucher? Redeem it now.