AfricaHedge Symposium 2007
Venue: ArabellaSheraton Grand Hotel
Location: Cape Town, South Africa
Dates: Thursday, 06 December 2007
Thursday, 06 December 2007
The first South AfricaHedge Symposium, held on 6 December in Cape Town was a stimulating and informative event for all participants, not least because 2007 proved to have been the first true test for many. Over 200 top industry players in the region come together to debate and discuss the future of the industry in the region.
Taking the South African hedge fund industry to the next level
Managers and other leading industry players gathered in December at the South AfricaHedge Symposium to discuss key issues and challenges facing a rapidly growing business
"Sustaining Excellence" was the theme of the inaugural South AfricaHedge Symposium held at the Westin Grand Arabella Quays in central Cape Town in early December, with keynote speakers and panellists alike discussing ways to take the South African hedge fund industry to the next level, in the context of harder times for world markets and a growing appetite for investing elsewhere in Africa.
In their opening joint keynotes, Kevin Gundle of Aurum Funds and Ken Kinsey-Quick of Thames River Capital, both prominent global allocators, touched on many themes that were to recur during the day – from the global credit crunch to the emergence of new strategies.
Gundle began by summarising what had gone right for hedge funds during 2007, with money under management increasing amid growing acceptance from investors and a record number of 319 funds launched worldwide in the first half of 2007, raising $33 billion. Of the top 20 launches last year, a remarkable 13 different strategies came to market.
"This year's events were a welcome reminder that managers should not become the slave of their tools," said Gundle, referring to the sub-prime crisis in the US that began mid-year, with severe repercussions for many hedge funds. "So the credit crisis is a bit like a forest fire. There's initial damage as the overgrowth is burnt away but ultimately the healthy plants thrive…they create space for new species."
Ken Kinsey-Quick was unequivocal in his view that the credit crunch is a 'defining moment' for the hedge fund industry, and no one can really be sure how it will play out. "These defining moments [like October 1987, February 1994, August 1998] really separate the wheat from the chaff, the top quartile from the rest of the pack. They make heroes and unfortunately, zeroes as well."
Kinsey-Quick said managers who prevailed during the inevitable downturn in the markets as liquidity dried up should ultimately prosper.
Thames River Capital
Against this broader view, domestic fund of funds players sat down for the first panel discussion of the day, chaired by Dale Lippstreu of Maitland Fund Services. Panellists Lee Dalley of Blue Ink Investments, Carla de Waal from Novare, Murray Todd of Edge Capital and TriAlpha's Theron van Wyk agreed that the South African industry was fairly conservative, given that many investors were first-time institutional allocators seeking to temper volatility in their portfolios. But they acknowledged a growing high-net-worth market, with a more aggressive risk-return profile, as well as an increase in more aggressive mandates.
Has the South African hedge fund industry delivered on its promise? So far so good, but the jury is still out. "We haven't had a proper stress test in our market since the industry has been a decent size," noted Van Wyk from TriAlpha. "The true test will be if the next 6-12 months are difficult – we'll see whether the hedge funds have delivered."
Blue Ink's Lee Dalley noted that while the broader industry does still need to be tested, there are mature funds with track records stretching back to 2001, which came out well after the market pullback in 2002-03. "Inherently the skills are there, so we can do pretty well if things get tougher," he said.
Panellists hailed increased transparency as a unique advantage for local investors compared with their peers in other parts of the world, allowing them to manage risk more carefully in blended portfolios. The local industry has seen a concerted drive for daily transparency from underlying managers since the Evercrest Capital collapse in mid-2007.
The issue prompted some close questioning from the audience. What are funds of funds doing with all this information? How can hedge funds be sure that their positions will not be leaked into the market? Is there a risk of over-managing underlying managers?
The panel concluded that given the comparatively small size of the South African industry it is manageable, and indeed useful, to have daily transparency, particularly where managers in their formative stages prefer flexible mandates – and in an environment of confidentiality. But there may well come a time when managers need to be more careful about what they disclose as competition grows.
The thorny issue of capacity was also raised, in response to an earlier point from Gundle, who suggested there is more talent in the South African hedge fund market than there are opportunities.
Panellists discuss the purpose of hedge funds in South Africa
The panellists agreed that for now there is sufficient capacity among capable managers for them to grow their businesses. Managers were also venturing into new areas, but the equity space had the potential to become overcrowded. The removal of exchange controls by the Reserve Bank – something raised throughout the day – would allow local managers to venture beyond local borders.
Equity long/short managers were next up in a panel debate chaired by Steve Brent of Cadiz, who began by asking if the giddy returns of recent years are repeatable.
"There will be some normalisation of returns as we have been in a bull market for several years," said Cy Jacobs of 36ONE Asset Management. "But there is an enormous amount of specialist knowledge out there and the long/short space will remain dominant for years to come."
Peter Armitage of Investec Private Client Securities noted that running bigger pools of capital certainly made it more challenging to generate outsize returns.
"But if the country is growing at 4-5% GDP there have to be opportunities to make money. And for the first time [in years] we have had some real long/short opportunities…When you have sectors and companies going down 10-20% in one month, the hedge fund toolbox becomes quite attractive."
"We are a small industry and there isn't enough competition, which is why you can see the returns you do," added Khulekani Dlamini of Renaissance. "But some people who have touted themselves as market-neutral long/short strategies have really been riding beta. It will be telling when the market turns."
Managers agreed that the mid-cap space had the potential to become crowded, with the need for flexibility to keep finding opportunities. And on the subject of scrip lending, the market was fairly tight.
"It is easy to short with the large caps – but a little bit difficult with small caps and illiquid stocks," said Malungelo Zilimbola of Mazi Capital.
Next under the spotlight was multi-strategy, with Warren Chapman of Peregrine Prime chairing a panel including Rowan Williams-Short of Orthogonal, Uys Meyer of BlueBay, St John Bunkell of Mergence and Bruce Simpson from Sanlam Investment Management. The nature of multi-strategy mandates came under scrutiny – with panellists agreeing that managers needed to communicate carefully with investors as to whether they took a full-scale multi-manager, multi-strategy approach or planned only an occasional opportunistic foray into other areas.
"Most of these funds develop over time," said Meyer at BlueBay, the country's largest multi-strat fund. "When you start you may only have a mandate for what you plan to do originally – on balance, a very wide mandate allows you to develop all the strategies within one fund provided there is a continued update to all your investors; a proper breakdown on strategy, asset allocation and risk guidelines."
Bunkell pointed out that "the multi-strategy environment is the domain of the innovative", as has been seen with its evolution elsewhere in the world. He said the local derivatives space is evolving into a more meaningful zone for managers, as are areas such as asset-backed finance and mezzanine debt.
Orthogonal's Williams-Short said the issuance of convertible bonds locally was one area, in particular, that would play well into the hands of local hedge fund managers, and pressure should be put on corporates and banks in this regard.
SIM's Simpson noted that fixed income had always been the "baby brother" compared with equities, but this was starting to change as managers ventured into multiple fixed-income strategies and considered their mandates more carefully to include the distinct properties of the asset class, including issues such as VAR-based models to effectively gauge risk.
The potential for conflict of interest to emerge between multi-strategy funds and fund of funds, as seen globally, was raised in a question from the floor. The panellists acknowledged the potential overlap, pointing out however that the nascent stage of the local multi-strategy sector meant it was not yet an issue. The key was clear communication, and there was room for both to thrive.
Terence Moll, global strategist at Investec Asset Management in London, offered a comprehensive analysis of hedge fund returns and fees, providing much food for thought. His conclusion: hedge funds derive returns from multiple sources but, ultimately, only those offering alpha can justify higher fees. Growing institutionalisation in the industry, leading to low-cost replication structures, meant that savvy investors would be less likely to pay alpha fees for beta-type returns.
The potential for the local industry to spread its wings was a hot topic in a session entitled "Beyond the borders: the bigger opportunity" chaired by Isabella Burke of Investec prime brokerage. Panellists included Heiko van Wyngaarden of Oryx/Optis and James Gubb of Clear Horizon (both running Africa long/short strategies), Gavin Joubert of Coronation, who is preparing to launch a global emerging market strategy advised from Cape Town, Alun Thomas of Imara Securities, which offers brokerage services in sub-Saharan Africa, and Rob Nichol of Baobab Capital, who advises on setting up offshore structures.
Gubb and Van Wyngaarden made a clear case for South African managers venturing further north, believing they have the necessary skills in emerging markets, commodities, and in Africa itself to identify opportunities and risks.
Joubert stressed that location should not hinder a manager from having a global mandate. The right team, research support and a longer term investment strategy created an environment that can ensure success.
On the investment case for Africa, Imara's Thomas noted that many markets in sub-Saharan Africa remain illiquid and risky – but the opportunities are significant.
Is Africa the most difficult of all the emerging markets? Undoubtedly, but therein lies the opportunity, the panellists agreed. The continent presents the next frontier – while tricky, it is also potentially very rewarding.
Van Wyngaarden noted the obstacles for local managers as they seek to broaden their horizons – repeating the issue of exchange control and also the fact that South Africa has, thus far, not been particularly successful in luring other African companies to list on its exchange.
Foreign investors need offshore structures that deal with tax and currency risk, and the panel agreed that such solutions are in fact proprietary, requiring homework and capital outlay.
Nichol pointed out that local managers face a grilling from foreign investors as they broaden their investor bases. "They are going to know an awful lot about you," he warned.
The final panel brought together incubators and managers of off-piste strategies in a session called "Breaking new ground" chaired by Nick Evans, editor of EuroHedge, South AfricaHedge's sister publication, who noted increasing signs of diversification locally. Gavin Glick of Peregrine Investment Management said several structural changes would help to spur new strategies – among them the abolition of exchange control and also the development of the secondary credit market.
While savvy managers do, in fact, have tools at their disposal that can sidestep exchange controls, it is all about "ease of execution", as one manager pointed out, and few were likely to avail themselves of such opportunities if they remained unduly complicated.
Praesidium's St John Bungey said the response to his innovative structured finance fund had been much better than expected -– with domestic investors showing willingness to back new managers in niche areas.
While the long-only world has until now been the major pool of talent for new hedge fund managers, proprietary desks within banks offered the next wave – which would in turn encourage more innovative strategies, such as the multi-asset class trading strategy offered by Steve van Schoor at Genesis, who hails from a prop trading background.
The panel's conclusions reiterated points made during the day – that activism is the realm of hedge fund managers everywhere, that talented hedge fund managers have a role in showing investment banks and other corporations new areas of activity and that, as with their peers globally, South African hedge fund managers can operate as a positive force for change.
A growing appetite for Investing in sub-Saharan Africa
"One of the most common questions that we currently face in investor meetings is that of sub-Saharan Africa," was the comment from Malcolm Levy, co-manager and co-founder of Kudu Emerging Markets, in his keynote address. "There is phenomenal interest in these so-called frontier markets."
Economies across the region have picked up substantially, he said, bringing with them tremendous opportunities.
"There is also a shortage of ways to gain exposure to these markets as few players have positioned themselves appropriately and the markets remain quite highly uncorrelated to the rest of the world," he said.
Levy, who co-manages the $150 million Kudu Emerging Markets Fund with George Case, also made the point that the competition for capital is the highest that it has ever been in the history of modern-day investment. With more than 100 countries growing at GDP of nearly 4% per annum for the first time in history, South Africa's GDP growth rates were not extraordinary.
The Kudu Emerging Markets Fund has recently increased its exposure in South Africa from 20% to 30% across the long and short books, driven chiefly by the commodity markets.
One issue that had implications for foreign investors in South Africa was black economic empowerment. "Morally, this is to be applauded. It is absolutely the right and proper thing to do," he said. "The result will be that in 10 or more, probably 20 years from now, economic growth will be sustained on a higher level. Foreign investors are aware of this need and support a restructuring of the economy. However, the reality is that the impact of the changes is not going to be felt by the current investors in the market in the near term."
Another concern was unemployment, with GDP growth rates not high enough to bring this down significantly, in a country with an already inflexible labour force.
"Other countries are pushing hard to be the recipients of foreign investment in whatever form it may come," he said. "South Africa's potential to compete is substantial but it does need to address [these issues]."
Levy also offered his views on the South African hedge fund industry, from the perspective of a London-based manager.
He suggested that his local peers make efforts to raise meaningful capital from the international investment pool, via funds of funds but also endowments, foundations and private clients. To cope with the scale of such investments, the 130-plus funds in the local market should consider mergers and acquisitions and consolidating small pools of assets on to more efficient platforms.
In investment strategy, Levy suggested his local peers look to launch new products in areas in which they have a competitive advantage, such as commodities, resources and infrastructure. The use of innovative structures to include private equity, which have been very successful elsewhere, were also likely to succeed here.
South African managers should look beyond their own borders in a more meaningful way, northwards to sub-Saharan Africa but also beyond to a more global focus, making use of the high-quality talent available locally.
To view the programme for the Symposium, click here.
Main & Lunch Sponsor: