Hedge funds opt for Agility in a Market filled with Interruption and Disruption

Peregrine Capital, South Africa’s longest-running hedge fund manager, hosted their first investor day on 16 February 2022 to share insights and learnings from two decades at the coalface of investing. Peregrine Capital has created exceptional wealth for its clients since 1998. The company currently manages around R12 billion of investor assets through its two local flagship hedge funds which are open to institutional and retail clients. They also offer a long-only offshore equity fund which launched in 2019. Their Peregrine Capital High Growth H4 QI Hedge Fund (High Growth Fund) is the first fund in South Africa to achieve 100X an investor’s initial investment, so a million rand invested in the fund in February 2000 is worth more than R100 million now*. Their Peregrine Capital Pure Hedge H4 QI Fund (Pure Hedge Fund) has never had a negative year since its inception in July 1998**.

At the event, Peregrine Capital’s Portfolio Managers David Fraser (Founder and Executive Chairman), Jacques Conradie (CEO) and Justin Cousins (Executive Director) discussed the year in review, the importance of having hedge fund exposure in a portfolio and they delved into what could impact the funds as they continue to chase superior risk-adjusted returns for their investors.

Initially, the panel focused on the juxtaposition of the polar opposite economic environments of 2020 and 2021, which Conradie admitted were challenging for Peregrine Capital. “In 2020, you got rewarded for being cautious and utilising hedging tools for downside protection, and investing in high quality stocks that were net beneficiaries of the pandemic.  In 2021 you had to do almost the exact opposite.  You had to maximise your long positions with no hedges, and pivot your growth exposure back into real-world businesses that would benefit from economies opening up.”

“Hedge funds aspire to deliver consistent market-beating returns while also protecting investor capital.  For example, in March 2020, when Covid hit, Peregrine Capital’s Pure Hedge Fund was actually up in a market that was down 15% (Source: Bloomberg), showing you how the funds managed risks and protected investors against downturns.”

Conradie added that caution, coupled with a high level of flexibility allows hedge funds to not only protect their capital from investments that do not turn out as planned but also move into more attractive opportunities. “As a hedge fund manager, you always want to have some hedges in place as you cannot perfectly predict what a year’s outcome is going to be upfront.  If we look at some of the positions we had last year in the portfolio, we had some exposure to high-performing Chinese technology companies, which dragged our performance in 2021 lower than we would have liked due to unexpected Chinese regulations.  We had the flexibility to pivot some of the portfolio back into South Africa, and it was especially pleasing how well our stock picking worked.”

“The property sector offered especially interesting pair trading opportunities. When COVID struck, all property companies were treated equally in a brutal and undiscerning market selloff in 2020. All companies in this sector sold off in unison, regardless of the quality of the underlying assets, the sectoral exposure or the strength of the balance sheets. Buying well capitalised retail focused REITs at the same discount to NAV as poorly capitalised office focused REITs proved to be a fantastic trade when it became apparent that the shape of the recovery would differ materially for those two sectors. That was a fantastic pair trade and shows you how an idea can generate outperformance without taking market risk.”

Some of the strategies employed by Peregrine Capital to deliver superior returns rely on the ability to invest across multiple asset classes and strategies. “Being a hedge fund, we typically have a lot more tools in our box to drive higher returns” added Cousins, “in order to take advantage of opportunities and volatility that typical investors in a long-only fund can’t.  We look to exploit very different and unique market opportunities; be it in the equity market or in the fixed income space, where we can short shares and take advantage of pair trading opportunities within sectors we know well.”

While the diverse options available to a hedge fund are useful in navigating short-term market fluctuations, the overarching investment process of the funds is vital to delivering these returns through full market cycles over the longer term – because there is certain to be another disruption around the corner.

“It is worthwhile reflecting that every year there will be new and unfamiliar events that you will have to navigate” says Peregrine founder, David Fraser. “Two decades in this business tells us that this is normal for markets.  You want to choose a manager that has seen various cycles and various events and successfully navigated through them.  If you look at the history of our funds it has been a fairly smooth journey of exceptional growth over 23 years, even though we had to handle our share of massive local and global financial and political events.  It is certainly pleasing that our values as an organisation and our investment process have stood the test of time”.

While the pandemic-induced market interruption which has dominated the world view over the last two years appears to be subsiding, it leaves behind a new operating landscape where disruption through technological innovation is the new norm. “Technological changes will only accelerate” says Conradie. “The advancements in machine learning, in artificial intelligence, and in other areas of technology will just continue as the large tech companies and smaller start-ups invest massively in R&D to drive this forward. We are keeping a close eye on the rapid development and innovation happening in Web3.0 and the crypto space.  It is very early and difficult to call, but it feels a bit like the internet in 1995, where the world was not quite sure how it would end up. It pays to keep a close eye on these sorts of trends as there is potential for this to disrupt some of the larger tech companies and/or other parts of the economy, which can either be a threat or an opportunity for Hedge Funds”.

While it’s difficult to predict the timing, scale and effect of any future disruptions, having the agility to alter investment strategies as these future events unfold certainly make hedge funds an ideal investment vehicle to create wealth from the uncertainty that is sure to always exist.

Peregrine Capital is an authorised financial services provider. Peregrine has been appointed by H4 Collective Investments (RF) (Pty) Ltd (“H4”) as the investment manager of the Pure Hedge Fund and the High Growth Fund (“the portfolios”). H4 is a duly authorised collective investment scheme management company. *All figures quoted are as at 31 December 2021. Since inception annualised performance return: 24.16% (SA Multi Asset High Equity Category: 10.8%; FTSE/JSE Capped SWIX All Share Index: 12.6%). **Since inception annualised performance return: 19.59% (SA Multi Asset Low Equity Category: 9.95%; CPI: 5.5%). Collective investment schemes are generally medium to long-term investments. The value of participatory interests or the investment may go down as well as up. Past Performance is not indicative of future performance. Collective Investment schemes are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commission is available on request from Peregrine Capital or H4. Neither H4 nor Peregrine Capital provides any guarantee either with respect to the capital or the return of the portfolios. H4 has the right to close the portfolios to new investors in order to manage them more efficiently in accordance with their mandates. Statements made do not take into account the needs or circumstances of any person or constitute advice of any kind. Information on key limitations, exclusions, risks and charges related to the funds is available on our website.  Full disclosures can be accessed here. For more information go to our website https://www.peregrine.co.za.