Dear Warwick Clients, Partners and Stakeholders,

In this issue of your monthly Warwick Wealth Matters, we explore one of the fastest-growing trends in South African wealth management: hedge funds.

In recent years, many quality South African wealth managers have increasingly turned to hedge funds as a valuable tool within client portfolios. This shift reflects a growing recognition of hedge funds’ unique ability to provide enhanced diversification, reduce risk, and seek higher returns, especially amid uncertain markets. At Warwick Wealth, we have embraced this trend and now include Regulated Investment Funds (RIFs) in many of our clients’ portfolios to better serve their financial goals. Let’s delve into the reasons behind this trend, the benefits hedge funds offer, and the differences between RIFs and Qualified Investor Funds (QIFs).

Why Hedge Funds?

The primary appeal of hedge funds lies in their ability to provide ‘alpha’, or excess returns above a benchmark or the market average. In traditional markets, returns are often closely correlated to broad economic trends, either in South Africa or internationally. Hedge funds, however, employ alternative investment strategies, including but not limited to, leveraging, short-selling, or derivatives. This allows managers to profit in both rising and falling markets. This flexibility enables hedge funds to generate returns independent of the general market’s direction, providing diversification that can improve the risk-adjusted performance of a client’s overall portfolio. Some of the advantages are as follows:

Enhanced diversification - with the aim to minimise exposure to market movements, which can smooth out returns over time. This added diversification can be particularly valuable for clients with large portfolios, helping reduce risk while still allowing for attractive growth potential.

Alpha Generation - Hedge funds seek to generate returns that outperform the market’s average returns. This added performance, even on a small portion of a portfolio, can significantly boost overall portfolio returns.

Downside Protection - Many hedge funds have strategies in place to protect against downturns, meaning they can perform well or better preserve value when traditional markets suffer declines. This is especially relevant in today’s volatile economic climate, where protecting downside risk has become as important as seeking growth.

Explaining The Types of Hedge Funds

In South Africa, hedge funds are typically structured as either Qualified Investor Funds (QIFs) or Regulated Investment Funds (RIFs). Both options are regulated, but they serve different investor profiles and have distinct features.

Qualified Investor Funds (QIFs) - QIFs are intended for qualified or sophisticated investors who have experience and understanding of the risks associated with hedge funds. Because QIFs are more flexible, they can access a broader range of assets and strategies, which can make them more volatile. They are not generally available to the everyday investor and come with higher minimum investment requirements.

Regulated Investment Funds (RIFs) - By contrast, RIFs are designed to be more accessible and often have stricter regulatory oversight to protect retail investors. They are more limited in terms of permissible strategies and leverage, which often makes them less volatile than QIFs. This balance of accessibility and control makes RIFs an excellent choice for clients looking for exposure to hedge funds without the high volatility.

At Warwick Wealth, we now include RIFs in many of our clients’ portfolios. By doing so, we provide them with access to hedge funds’ potential upside, while reducing the exposure to the more aggressive strategies that QIFs might employ. RIFs offer a more stable hedge fund experience that aligns well with a broader range of investment goals and risk tolerances. It should be noted that hedge funds can be exceptionally volatile and as such, where we have included hedge funds in a client’s portfolio, we have limited the exposure to also limit the volatility, but still gain several of the abovementioned advantages. 

Hedge Fund Costs and Performance Structure

It’s essential to note that hedge funds, including RIFs, tend to be more expensive than traditional funds. This is largely due to the performance fees many hedge funds charge. Unlike flat fees, performance fees mean that a portion of the gains is only deducted when the fund outperforms a specific benchmark. In other words, hedge fund managers are directly incentivised to deliver results, aligning their success with investors’ returns. While this fee structure can increase the cost, it ensures that clients are only paying for performance, making it a fairer approach for actively managed investments. In essence, if the hedge fund is not providing out-performance and ‘Alpha’, performance fees are not charged.

The Warwick Wealth Advantage

At Warwick Wealth, we’re committed to offering investment solutions that align with our clients’ goals and tolerance for risk. By selectively including RIFs within certain portfolios where appropriate, we provide our clients with the benefits of hedge funds in a regulated and controlled format. This allows us to add value by enhancing diversification and creating the potential for outperformance, while respecting our clients’ risk profiles and long-term objectives.

In summary, the increased use of hedge funds in South African portfolios reflects an evolution in many quality wealth managers’ approach to wealth management. At Warwick Wealth, our careful selection and incorporation of RIFs ensures that our clients can benefit from these sophisticated investment tools in a manner that is both prudent and forward-thinking.

As always, if you need any additional information or simply wish to catch up with your Wealth Specialist, Wealth Advisor or Wealth Planner, please feel free to make direct contact with us. 

Kind regards,
Marc Wiese

MD Warwick Wealth