Published in MoneyMarketing (Volume 2019 Number 7, Jul 2019, p. 10 – 11)
Hedge Funds: Superior risk-adjusted returns
Peregrine Capital was founded in 1998 and is the longest standing hedge fund manager in South Africa. We have been there from the beginning, helping to protect and grow the wealth of our clients. We have built an exceptional and stable team of investment professionals who are solely focused on refining our investment process each day, to deliver superior risk-adjusted returns for our clients. Our process is built on the foundations of honesty, integrity and an unerring pursuit of the truth, so that investment decisions in our hedge funds are based on facts rather than feelings.
We invest alongside our clients
We actively seek to align our own interests with those of our clients. We are cumulatively a top five investor in our funds and staff own 50% of our business. The manner in which we reward and promote our staff is designed to foster excellence, longterm focus and commitment to our clients. We hope to attract clients who have similar like-minded, longterm investment horizons. Times of market panic often present the best investment opportunities, and it is only with the confidence of our clients that we can meaningfully engage these rewarding opportunities.
- We believe that disciplined and consistent application of our investment process will result in the generation of superior returns for our investors over the medium term.
- We analyse businesses and determine what we think they are worth. We buy shares that we believe are undervalued, and sell those that we believe are overvalued.
- We believe that consistent outperformance can only be achieved through superior knowledge of companies and their securities, not through attempts at predicting what is in store for the economy, currencies, interest rates or the overall level of markets.
- We embrace situations that are complicated, difficult to analyse or that require considerable effort, as this often gives us an edge against competitors.
- Honesty and integrity are the core of how we interact as a team, and with our clients.
- We maintain a flat structure, and actively encourage robust debate, diverse opinions and contrarian views, in order to seek out the truth.
- We constantly strive to improve our investment process and all other parts of our business. We are never done learning and continually look for new opportunities to improve ourselves.
Performance with lower than market risk
The Peregrine Capital High Growth H4 QI Hedge Fund (the “High Growth Fund”) has delivered a net annualised return of 26.1% per annum since inception on 1 February 2000, compared to the FTSE/JSE Capped Swix All Share Index (the “Index”) return of 13.1% and the average ASISA South African MA High Equity (the “High Equity Balanced Fund”) return of 11.0% for the same period (see Graph 1 above).
The Standard Deviation, which measures volatility in hedge funds, has been 7.4% for the High Growth Fund, 12.1% for the Index and 6.4% for the average High Equity Balanced Fund for the last ten years. This demonstrates far lower volatility for the High Growth Fund when compared to the Index and slightly higher than the average High Equity Balanced Fund.
The lowest calendar year net return since inception of the High Growth Fund was in 2008, when the fund and the Index delivered -12.0% and -23.2% respectively. The fund ending down roughly half as much as the market.
Downside protection in uncertain markets
The Peregrine Capital Pure Hedge H4 QI Hedge Fund (the “Pure Hedge Fund”) has never had a negative year in its 21 year existence. The lowest calendar year net return since inception of this fund was in 2008, when the fund delivered +1.6% while the Index delivered -23.2%. In addition, the Pure Hedge Fund delivered a net return of +5.1% in 2018 compared to the Index of -10.9%, outperforming the market and still delivering a positive return.
The Pure Hedge Fund has delivered a net annualised return of 21.1% per annum since inception in July 1998, compared to the average ASISA South African MA Low Equity (“Low Equity Balanced Fund”) return of 10.2% and Inflation (CPI) of 5.7% for the same period.
The Standard Deviation, which measures volatility, has been 3.6% for the Pure Hedge Fund and 3.4% for the average Low Equity Balanced Fund over the last ten years. This demonstrates similar volatility for the fund when compared to the average Low Equity Balanced Fund.
Lower market correlation
Graph 2 clearly displays that our two flagship hedge funds do not simply track the equity market, as evidenced by the low correlation with the Index. We believe that investors who are looking to construct a well-balanced portfolio comprised of investments with low correlations to one another, should consider adding our funds to their portfolios.
There is an inverse relationship between size of assets under management and the ability of an asset manager to generate returns. Boutique asset managers, like ourselves, benefit from higher liquidity relative to our fund size and typically have far more investable opportunities than larger fund managers. We are able to rapidly invest in new ideas and to change our minds where circumstances change or where an investment thesis no longer holds true. These are luxuries not often afforded to larger asset managers.