Hedge funds offer investors higher returns and lower drawdowns than traditional long-only portfolios, according to Peregrine Capital chief investment officer Jacques Conradie (pictured).

The worst drawdown for the Peregrine Capital High Growth H4 QI Hedge fund over the past 22 years was a modest 7%. In addition, a portfolio with a 40% exposure to hedge funds would have achieved more than double the returns of a traditional portfolio with 60% allocated to equity and 40% allocated to bonds.

Speaking at the Glacier Gauteng Investment Conference 2022, Conradie said a 20% exposure to the High Growth fund and a 20% exposure to the Peregrine Capital Pure Hedge H4 Retail Hedge fund would have given a 119% higher return over the past 10 years than an old-school balanced fund.

Writing in the High Growth fund fact sheet, Conradie said the fund might experience negative returns at a lower level than a fund only invested in shares. Its maximum cumulative drawdown has been 7.1%, compared with 26.6% for the Capped Swix index and 14.3% for the Asisa multi-asset high equity category. The High Growth fund was the first fund in South Africa to deliver 100 times its initial investment.

Different risk profiles Conradie said there was a mystique about hedge funds, yet in South Africa they have the same regulatory oversight as any other collective investment scheme. ‘They invest in the same assets as a normal balanced fund – primarily listed equity, bonds and property – and they cater for different risk profiles. Our High Growth fund is best compared with the Asisa high equity sector and our Pure Hedge fund with the Asisa low equity sector.’

Conradie said hedge funds should appeal more to conservative, risk-averse investors than conventional unit trusts. ‘As we can short shares, we can adopt a bi-directional investment strategy, which can generate returns irrespective of market direction. We have more ways to manage risk.’ Conradie said Peregrine took out straight short positions when it was convinced an asset was mispriced and would derate. In addition, the fund manager also takes out shorts when a company is unbundled.

He added that the fund manager was increasingly shorting shares in pair trades when it saw that prospects were better for one company in an industry than for another. For example, it has recently shorted Tiger Brands, a food conglomerate with numerous problems, while being long Astral Foods, a much simpler and better-managed food business in their view.

Special situations Peregrine also took advantage of special situations and piled into coal producer Thungela Resources after Anglo American unbundled it. ‘It had lots of indiscriminate selling after listing, and we did scenario analysis on various coal prices, which showed the valuation on the listing was extremely cheap.’

Peregrine is also an active user of put options, allowing it to revise asset allocation without selling at bottom prices. Conradie said the downside correlation with the Capped Swix has been just over 30% over the past five years. For the five largest funds that make up the Asisa multi-asset high equity category, the downside correlation was between 80% and 90%.

‘In the second quarter of 2022, we achieved a 3.6% positive return. Evaluating performance over such a short time is fraught with randomness and bias. But we are pleased to have delivered positive returns for our investors when the sky appeared to be falling around us.’ Conradie said Peregrine had conservatively positioned the fund with a gross equity exposure of 163% and a net exposure of 58%.

The fund lagged the high-equity sector in 2021, providing an 11.2% return compared with 20.2% from the sector, but it has bounced back with a 3.3% return in the first half of 2022, well ahead of the high-equity sector average of -7.3%.