Solving The Riddle Podcast
Financial decisions shouldn't feel like a mystery. Solving the Riddle simplifies the world of money, providing the tools and topical advice you need to master your personal finances and secure your long-term wealth.
Solving The Riddle Podcast
Unpacking Hedge Funds in Financial Planning
Use Left/Right to seek, Home/End to jump to start or end. Hold shift to jump forward or backward.
In Episode 03 of Solving the Riddle, Andrew and Alec are joined by investment specialist Waldo Booysen from Peregrine Capital to demystify the role of hedge funds in modern financial planning.
Once reserved for the ultra-wealthy, hedge funds are now highly regulated and increasingly accessible to South African investors — offering powerful tools to manage market volatility and protect wealth.
You’ll also gain practical insights into:
• How hedge funds generate returns in rising and falling markets
• Real-world strategies like pair trades and special situations
• Why hedge funds can help manage risk in retirement portfolios
• How fees work — and what you’re actually paying for
• What global institutions get right about hedge fund investing
Whether you’re refining your strategy or exploring new opportunities, this episode breaks down how hedge funds can play a role in building and protecting long-term wealth.
Follow our personal accounts:@alecriddle @andrewwhitewood THE INFORMATION SHARED IN THIS PODCAST IS FOR INFORMATION PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL ADVICE IN ANY WAY OR FORM. IT IS IMPORTANT TO CONSULT A FINANCIAL PLANNER TO RECEIVE FINANCIAL ADVICE BEFORE ACTING ON ANY INFORMATION SHARED.
Hey everyone, welcome to the room. Financial issues shaping your future. And together with any riddle, we have ideas, ideas, strategies to help people make smart financial decisions.
SPEAKER_01Right, good day, everybody, and uh welcome back to another episode of Solving the Riddle. This is episode three. Uh, very encouraged by the response to our first two editions. Uh, Andrew and I are highly motivated uh to continue with this and to build it into the industry and become hopefully one of the leading financial planning podcasts in South Africa. To do that, we'll need your support. So please don't forget to uh to like, uh, comment and subscribe. That'll be uh really help us a great deal. So today we're going to be unpacking hedge funds. Um, this is something that's become an integral part of financial planning, relatively new to many of us, I'm sure new to many of our viewers and listeners, and we'll try and keep it as simple as possible. And to do that, not only have I got Andrew Whitewood with me, but we've also got an expert from uh Peregrine Capital, uh Valdo uh Boysen. And uh Valdo, maybe you can tell us just a little bit about yourself, first of all, on the personal side, and then you can weave into the business side.
SPEAKER_00Yeah, so Alec, uh I live in a quaint little town called Stellenbosch. I'm married, I like a bit of mountain biking, I like uh let's say head training. So yeah, it's uh it's an interesting, let's say, combination with me being your sales guy because I know about of your history. So, yes, that's uh what I do when I don't work. Um, I think in terms of this industry, I've been in it for around 14 years now, most of it on the sales side. Uh I started off as a Lisp guy, uh platform guy, actually, and then moved into advice, and then I moved over to Peregrine, and that's how I got to know you guys where I work as an investment specialist now. So I've been the guy that's been telling Alec and Andrew about the hedge funds, and that's why I'm sitting here today.
SPEAKER_01Yeah, and Andrew, I think uh Voldu has done a done a good job of uh helping upskill us in terms of hedge funds together with with other hedge fund managers and uh people we we've met. But um perhaps you want to come in and you know just touch a little bit on what we're talking about today.
SPEAKER_02Yeah, thank you, Alec. I think the key thing is, Voldo, it has been a journey, right? Together, um we got exposed to hedge funds probably a couple of years ago, Alec. Um and it was daunting for Alec and I too from a financial planning point of view. But the key thing that Alec and I have spoken to and about in the first two episodes of the podcast is things are always evolving, right? And we're keen to learn. I think that's the key thing for us today is to unpack hedge funds, um, give a little bit more information, put people's mind at ease, but also understand how a hedge fund can be used within a current or future investment portfolio, Alec.
SPEAKER_01I think the other thing that's also important for our listeners and viewers to know, and uh is that it's a highly regulated space. So, for example, when I first learnt about hedge funds, which are available on all of the major platforms from Alan Gray to Mutual Wealth, Momentum, etc., um, I couldn't just go and pick a hedge fund and use a hedge fund. Um, we first of all, from a business point of view, I remember speaking to you about it. Private wealth management had to go and do some due diligence like all of the other companies, uh, on companies like Peregrine and other hedge fund companies. Um but even then, when it became an approved product on our um platform, uh I couldn't use hedge funds because I had to basically go back to university and I had to study again and write exams to become qualified. So um only then, and uh in fact I'm still under supervision, I think. Are you my supervisor? I'm actually your supervisor still, Alec. 16 years ago I was your supervisor. But anyway, yeah, so I think it's important that people realize that um, you know, you can't just go and pick something because you like it. You have to have great knowledge, you have to learn, you have to uh show that you're qualified and experienced and so forth. And uh Waldo, maybe you can just come in here and talk a little bit about the the sort of compliance, the regulation, the legislation, etc.
SPEAKER_00Yeah, yes, Alec. I think back in the day, the first perception of hedge funds out there was it was for wealthy people. Um our one fund was launched in 1998, other one was launched in 2000. And and sorry, can I just mention that was for institutional funds only? Yeah, or for yeah, so so it was let's say it was a locked out kind of product for most of the people um that's uh that's listening now. Whereas we're sitting in the uh in a current situation of you can access the funds for the minimum debit order that you guys have via the platforms. And the nuances when it comes to new products, I'll always move back, and I think I've moved mentioned this to you previously. Like the first Unitrust in South Africa was the Sage Unit Trust. That was launched in the 60s, it got absorbed numerous times, you won't be able to find find it now. But before that, it was only life funds, and then unit trust came to the fore much more aggressively, let's say in the 90s, and the same started to apply with us where legislation changed where advisors could start accessing edge funds, but then you needed product that was retailed, wasn't available, and we were one of the first guys to bring retail hedge funds to the 4-2 advisors, but then there was another hurdle. Guys needed to have licensing. So, not all advisors are licensed to make use of hedge funds, and that's where it gets quite funky because if you think about this, you need to be a specialist investment advisor to be able to um offer this to your clients. As mentioned, you need to go through a lot of training programs. I think you've gone through our videos that we gave to you guys, where you need to log this, it's a two-year process. We need to go through this, so it's not something that just happens overnight. A run-of-the-mill advisor can't just walk out from the street and say, Listen, I want to sell this to my clients. And this is where it gets to let's say the just of it, where hedge funds are complicated products when you don't understand them correctly. And this is where I got to know you guys. This is how we actually built a relationship from Peregrine and PWM, where it is an ongoing relationship now. This isn't something that's getting flogged down to the client, is there's a specific need for the product, and you guys use it for that.
SPEAKER_02And Valdo, if I could just step in and thank you, Alec. The key thing from a private wealth management point of view is that we are very strict with regards to the supervision process, that subcategory we know is 1.26. So I just want to add that point that it's not every single financial planner out there that number one can advise on hedge funds, but then number two, from a business point of view, which we find a lot of comfort in, Alec, is that we've got this framework, this regulatory compliance framework where we guided, like you say, you referred to these videos. We partnered with the likes of Peregrine and other managers out there and partners that are helping us on this journey. It is a long process, it's two years, but once again, Alec and I are always willing to learn, uh, take the time out of our diaries to partner with the likes of uh Peregrine Capital to almost enhance or most definitely enhance our offering to clients.
SPEAKER_01Yeah, great. I don't want to go down too much the compliance route because otherwise we're gonna lose some of our listeners. So come back in because what I want to do is I want to uh hand over to Waldo and ask you, perhaps let's just use a simple example that everybody can relate to. I'm thinking of the Capitec ABSA um situation. Um perhaps you can just uh enlighten our viewers and and listeners about that.
SPEAKER_00So something that hedge funds do are very unique, unique to them, and it's called the Pear Trade. What that means is I go along one share. Normal funds can do that, anybody can do it. You can buy it via your direct uh share trading platform. So let's say I wanted to buy Capitech um post the Viceroy report because this is what happened with us. The share traders at a discount, and if you guys don't can't remember this, Viceroy was the company that actually caused the Steinhoff debacle and caused Steinhoff to fall into a heap. So when they uh wrote this report on Capitech, what happened was the Capitech share price started dropping. And our CIO and CEO Jacques Conrady, he covers financials and he's been invested in it personally since 2003. He said, guys, this thing's trading at a massive discount. We need to get in. So numerous guys could do that, and I think other funds did that as well. What we did secondly, and this is unique to Edge Fund, is we paired it with another share, we went short. I'm not gonna go too big into the intricacies there. Basically, what happens is it's almost like a Chinese guy. You sell it now and you buy it later. What happened was the share that we identified was APSA, and it's not like that we don't like EPSA, it's not that we don't want a bank there. There was just some writing in the wall that said they were losing clients, there was a pending Barclays exit. So there were that's a funny stuff going around with the share price, and it started moving down. And at the start, it added us about 20%, and it took a bit out a bit of volatility in our Capitech long position. And in the end, once Capitech started running, we sat in a situation where it gave us about 40% on Capitech, but because of the ABSA share price, it fell, we added extra 20%. So the position was seen as a 60% return.
SPEAKER_01Yeah, quite remarkable. And you know, just touching on ABSA, you know, maybe then the share price was dropping, but I mean ABSA is doing quite well now. And I look at it from a running point of view, being a running coach as well. And we just had the ABSA run your city uh race in in the city of not too long ago. And um, I think the whole countrywide that series has sold out, so it's one of the most popular uh events. So, yeah, positives to to ABSA on that front. Um, but let's talk about now. Uh Andrew Waldo said, you know, so we had a long position, we had a short position, took out a little bit of volatility, and that's what we are looking for in our client portfolios is to try and have a diversified portfolio where we have less volatility, which reduces sequence of return risk. We've spoken about this on uh episode two, how much is enough? Uh we'll obviously cover it again in the future, but that's incredibly important for people who are in retirement and drawing income. Perhaps you can elaborate.
SPEAKER_02Yeah, so I think the key thing, Alec, one step backwards is we're most definitely not fund managers and fund pickers. So also we're looking at the end of the day to blend certain solutions. Um but we've got a CAT 2 business within private wealth management that helps us with that. But the key thing, like you say, is we're looking to reduce volatility. And when you're drawing an income, a client needs a real return or a return above inflation of say 4%. And the key thing is you need exposure to growth assets, right? But when you're partnering with a hedge fund manager like Peregrine Capital, they can give us exposure to growth assets. We can get those inflation beating returns that our clients need, but they're minimizing that downside participation. So there's a whole lot less volatility and obviously feeding back into sequence of return risk. The thing is when you're drawing an income every month, you're selling units, okay? And if you're reducing volatility and in downturns that like we're currently experiencing with the Middle East crisis, hopefully that unit price is not decreasing as much because we have exposure, for example, to a hedge fund manager. So the client is selling yes less units and they have more units to participate in the upside or the recovery of the market. So it is quite technical, but I think a key thing with regards to, like you said, with hedge funds is it helps us manage volatility and it's it ensures that clients stay committed to their long-term investment strategy, Alec.
SPEAKER_01And let's also then touch on the fact is um with hedge funds, you have different call it risk profiles. Not that we use risk profiling, but you have the high growth fund, which we'll touch on a little bit later. But you also have the pure growth fund, which is a more conservative portfolio. Actually, pure hedge, Alec. Pure hedge, sorry. Hedge growing. So the Pure Hedge Fund, um, yeah, so if we take that fund as an example, that was launched in 1998. So we're talking 28 years of history, and it has never had a calendar year negative. And perhaps you can elaborate on all of the sort of um crises that uh that that has been encountered by this fund.
SPEAKER_00Yeah, like I think the history of Peregrine actually started there, and this is actually the nice part of it. So our company was started with Dave Fraser and Clive Nates, and we we got uh money to start managing the first hedge fund in Essa, and that was the Pure Hedge one. And as they started, it was the Asian crisis. So the market started going down, and over the 28 years, the Pure Hedge has seen the Asian crisis, it's seen the IT bubble go, it's seen the European debt, it's seen the subprime crisis, it's seen Nigate, it's seen Steinhoff, it's seen COVID, and it's seen Donald Trump numerous times. So, and yes, 28 years and no negative calendar years. And I think just to get into the nuance of the fun, the nice thing is it runs at a low volatility and it aims to give you, let's say, 10 to 12% per annum. And it's hit that. And that's that's the nice thing, is it it's kind of boring. I think when it comes to cars, you think of it kind of the Theatre Corolla, like uh the one that my brother-in-law drives, it's from 2003, and the engine lights still on, but it still goes. And that's the thing is look, the POE's engine light isn't on, so just to say that we hope not, Voldu. Yeah, yeah, no, no, it would have been terrible if that happened, but yeah, so that's where it actually starts coming from. It runs at an equity exposure, currently, let's say between 10 and 20, and that's usually where it runs at. And for any client that is very scared about sequencing risk and that is actually, let's say, concerned about market drawdowns, it's a very good fund to have as part of your quiver. And I think that's where you guys come in. Like when we started chatting about it, Alec, our first conversations was living annuity guys that we're drawing too much, living annuity guys that we're sitting with, let's say they were almost on the cusp of starting to draw too quickly into their capital. And this is where the hedge funds came in. We had added a bit more surety on a boring kind of side of things, and I think people always have they've got this perception that hedge funds fly high. It's more the Lamborghinis than the Volvos, like we're safe cars, we're the guys for your family, it's not the James Bond villain car, which is how it's perceived in the market.
SPEAKER_02And Valder, just speaking to that point, um, the normal man on the street can now access a hedge fund. So we're speaking about um pure hedge, for example. But if you look at the hedge fund industry in general, right? So a lot of our listeners, viewers, clients know about the long only space. So a normal balanced fund or essa multi-asset low equity fund. Do you mind just unpacking the different like ACISA categories? Once again, let's not get too technical, but what are the types of hedge funds out there in the industry? You've spoken to Pure Hedge, and we do know you have another solution called high growth. But when clients, listeners, viewers are having a look, doing their own research, what are the types of hedge funds that are available out there in the market?
SPEAKER_00So, Andrew, like the pure hedge is actually called the market neutral. So it needs to have a beta close to zero because that's what it says on the label. Market neutral. If you buy cash.
SPEAKER_01And I ask you just to explain. We've got a lot of people out there who will not understand what is beta.
SPEAKER_00If you've got a beta of one, it means you move as the market moves. So if the JSE goes up one percent, you actually go up one percent. If you've got a beta of zero, you're not associated to what the JSE does, and that's actually where it comes from. So correlated, which is very important, yeah. Yeah, it's a thing that you guys do. It's like you add a bit of diversity in it. So, yeah, that's what the market neutral strategy of us does. Now, a high growth fund is what you call a multi-strategy fund. And if you look at the underlying asset losses, it actually resembles a balance fund quite nicely. There's bonds, there's preference shares, there's property, there's equity. And I've once had this question like, do you guys own guns, tobacco? Uh, what's the other one? Oh, gambling and financial is because it was a question from a client that was concerned about it, and I said yes, but in three days' time we might not have those shares. So we are quite agile, but yes, the multi-strat, that's what happens, and also for the clients that want to ask, half of the equities that we've got at the moment is actually offshore, so we're not constrained purely and solely towards SO. That's the other thing. Then you get long short hedge funds, and what they do is they're actually more equity buyers, so you'll find more shares in it, not a lot, let's say cash and bonds, and they go long and short on shares. In general, they have higher volatilities, so that don't that doesn't really speak towards let's say the boring nature of what we're actually discussing now, but that's where it gets funny. Hedge fund classifications can be also misleading where you get multi-strad funds that are very volatile.
SPEAKER_02And fixed income solutions, for example, as a volder. That's where Alec and I have learned a lot that you see a fixed income solution, and naturally, we as financial planners, when we started engaging with hedge fund managers, you think fixed income, it's more conservative, more a backfoot player, maybe a Hashim Amla. But then when you start engaging with the managers, some of these fixed income managers are targeting like CPI plus six, seven, and eight. And Alec and I were like taken aback. This is a fixed income manager, but because it's in the hedge fund space, what we're used to on the label is not what you're going to experience in the tin.
SPEAKER_00And I think that's uh actually a common, let's say, miss misperception that goes around in the industry because if you think fixed income, if you think cash, if you think bonds, that's my zero to one year or zero to two year cash that's sitting there, so it's safe as houses, and now if you go into hedge fund classification, it's completely different. So, yeah, that's the and I'll get back to like the crux of this thing is we need to work on the education in terms of this industry that you guys are equipped to actually sell the funds correctly. And I think that's why we spend so much time together with PWM and myself with the both of you, where we can find ourselves where you guys know the products and where they slot in. So you're not buying a can of coke and drinking cream soda, you actually know what's on the tin and it actually delivers what it's what's there. I think if we move into what's another thing that might scare, like if I speak to my mom about this, she'll be like, Oh, but I watched Wolf of Wall Street. Uh actually she didn't watch Wolf of Wall Street. I'm quite glad about that. Um, but let's say you take a boiler room example or Wall Street, where hedge fund managers are seen as guys with private jets, they're seen as guys that does dodgy deals, and that's an American misconception. I think what you find in our firm is there's more than four actuaries and COs running the funds. These guys luckily look at your shoes when they're talking to you. So you almost find guys that they live and breathe these funds, they live in front of a PC, that's what they're there for. They spend all their time there, so it's not this wild racy kind of gambling perception that is out there in Hollywood. South Africa is the let's say the strictest, uh let's say mostly aggressive regulated hedge fund industry in the world.
SPEAKER_02Since 2015, hey Voldu. So we were speaking and obviously preparing uh for the podcast today, how well regulated the industry is, and like Alec, you said earlier, we we don't want to go into the compliance aspect, but I think it's very important for our listeners and viewers to know that since about 2015, Voldu, this industry in South Africa specifically has just been so well and highly regulated. It's also regulated by the Cisco Act. I don't want to unpack that in too much detail, but that's the same act that governs um long only unit trusts in South Africa. So once again, just to put everyone's uh mind at ease, this is not a big black hole, it's super well regulated in South Africa, and we're really comfortable with these solutions.
SPEAKER_01I think the important thing is that probably the financial planning industry is the most highly regulated in South Africa. Um and the compliance is is top-notch. And then when you look at hedge funds, it is the most highly regulated of all of the spheres within financial planning. So so that's also very important. Um I just want to uh go back to let's let's go to another example. When um there are opportunities out there, when would uh peregrine be looking at opportunities? I think of probably a very unique deal uh was the Steinhoff deal. When everybody else was running for the Hills, uh Peregrine seemed to be having a closer look at Steinhoff and opportunities. Perhaps you can elaborate on that.
SPEAKER_00Yeah, well that's actually something that we call as a special situation. And what happened with Steinhoff is obviously anybody on the on the street knows that the share price basically went to zero, lots of money was lost, and they had pref shares that was attributed to Peppinakamans. And we bought this at it's uh just bought it.
SPEAKER_01Let's just unwrap a quick pref share for our clients as well. Our listeners?
SPEAKER_00Okay, so a pref share is as a normal share that you get, but this one pays out a fixed percentage on its value.
SPEAKER_01And they're the first uh pref shareholder is the first person to pay it ahead of credit uh creditors and normal shareholders.
SPEAKER_00So it's there's virtually no risk here. Always a bit of risk, but but let's say virtually no. So what happens then is we bought this, and the reason why we bought the the pref shares is because we could see the underlying companies that actually pays the um the dividend out, and that's where it gets interesting because we bought this at a massive discount, but we received a running yield the entire time, and we did about 15 times our position there. So that's a good example of it, something that's very unique to H fund that what we can do. Another example that I can say, and this happened in 2022, is we bought to Ngela at a PE of one. A PE is it it's a factor that tells you how long you have to wait to get your money back. So if you've got a P of one, it means you get paid your whole share price that you paid for. That's you pay 10 Rand, it means you get 10 Rand back in dividends the next year or in earnings.
SPEAKER_01So that's price to earnings ratio.
SPEAKER_00Getting your money off the table, in effect de-risking yourself. So we bought in there, and that share price basically, I think it went from 30 Rand to something something like 360 Rand in one year. So that's also a special situation, but that is more investment technique. Uh a long only fund could have also done that. But I'm just speaking to the way that we analyzed and we saw okay, listen. This is the way that we could buy in and what I also enjoyed about all our positions where we go for the special situation is our investment team are heavily connected to that position. So like I'll use the Tungela one, we sat with the management almost every two weeks and we sat with Transnet also also almost like on a monthly basis just to figure out listen, can you guys get the coal to the harbor? And then we can export it. There was a uh great offshore demand for coal, and this is actually what created it. So, yes, that's the kind of way we a special situation arises. And as mentioned, it's rewind back to Steinhoff. Usually it's the bad boy in the market that creates opportunity because once there's big losses, there's numerous things that fall out, and we could actually jump on it.
SPEAKER_01Yeah, excellent. So, yeah, so there are some great examples, and you know, Andrew, perhaps we can talk about how do we have we started using hedge funds within our client portfolios. Um, we touched on it earlier. So try and reduce volatility, protection on the downside is is massive within hedge funds. Do you want to elaborate on that?
SPEAKER_02Yeah, so I think the key thing there, Alec, is involved, it's all about investor education, right? So investor education, we we focus on that with our clients. We take our clients through at least one meeting where we we explain to clients the process. Plain and simply we start in the long-only space and then we move into hedge funds. We don't uh allocate um money to hedge funds for all our clients, Alec. I think the key thing in the um post-retirement space, we do allocate um a certain amount to hedge funds. I think the key thing there is also how much you allocate. And Valdu, we've had many discussions about this. So you've got to move the needle, but how much do you want to move the needle? And when we mean moving the needle is in our opinion, you can't just allocate like 5% to a hedge fund, Alec. You need to allocate a sizable stuff, uh, amount, should I say you need a meaningful position within a client's portfolio. Um and maybe, Valdo, we should unpack that in a little bit of detail, right? And I think we might not agree on the specific percentage. Um, but the key thing to note is that between Alec and I, we're looking at about 20 to 30 percent. With some clients, we're allocating a little bit more. We might not necessarily allocate just, for example, to Peregrine Capital. Valdo, you are well aware that we've partnered with other managers. We also have a fund of funds solution, Alec, that we are starting to use, which actually includes the Peregrine High Growth Portfolio too, Valdo. So maybe just to put you on the spot, uh, throw the question back to you, is in your opinion, I know you've done a lot of backtesting, um, and we've had some healthy arguments and conversations around this. Is what is kind of the percentage that you would like to see as an investment manager? And then we can discuss this, uh, discuss that point and that percentage and amount in this forum.
SPEAKER_00Yeah, I think when you like move back into it, let's start off with the client because this is what this is actually about. So you use the hedge fund as a tool, and it's part of a package that you create for the client in terms of what his needs are. So we let's use the sequencing risk example. So some clients may even end up with 60% allocated towards hedge funds, not peregrine capital. So that's the first thing because then you're putting too many eggs in one basket. So this let's say what I found in the industry norm and standard where we've moved towards was actually between let's say 15 and 30 percent, where it makes a meaningful difference. Um, but remember I'm very biased, so I've got 100% of my money in there, like my wife's got 100% of her money in there, my mom as well. But that's the way that we work around with it. I think when you start having a look with how these allocations work, it's actually better to know why you're doing it, and not just saying, okay, I'm using five hedge funds at Anakin. And I think that's where you guys are at. You're saying, okay, we're using it for lower vol, downside protection, and boring kind of the value add, right? The key value add. And that's about the education drive there. Because sometimes, and I think this is where the common misperception actually comes from, is if you have a look at let's say a US um hedge fund that's got a massive gross exposure, that'll never be the used for that need, it might need to be used for something completely different, like long-term growth. Because think about this, like your high growth fund, if it averages 15% per annum, you're doubling your money almost every f every three to five years. So that's actually a very nice thing to have. And if you've got that bucket and you are addressing, let's say, certain shortcomings in the client portfolio, that's where the allocation comes in.
SPEAKER_02And the one free luncheon investing is diversification, okay. And Alec and I are very firm on that. And it's also nice for you to have brought in the rule of 72. Alec and I unpack the rule of 72, and I think uh our first podcast, Alec. But yeah, it's about diversification, blending different managers and investment styles. But the key thing for Alec and I is obviously partnering with managers that private wealth management have done their due diligence on. And the key thing, Alec, and and I'll bring you into the conversation here, is we want to get clients over that finish line. And like you said, rightly so, with a lot of your clients, you might have been or have exited the industry. But the key thing is you're already seeing clients into retirement, helping them successfully retire, and then a lot of clients are it doesn't matter on their age. It's not if they're 75 that a hedge fund is not appropriate. For example, Volder, you spoke about the pure hedge fund. That might be a great solution for a client that's in, for example, their 70s or even their 80s. Alec, what's your view on that?
SPEAKER_01Yeah, well, I think the important thing is, you know, um our last episode we spoke about you know how much is enough, and we spoke spoke about the high drawdown rates in the industry. So if a person's got a living annuity, you know, the average is is probably seven percent on on the total uh amount of uh capital uh or the total amount of uh living annuities and so forth, and probably you know, when you start taking out the big ones and you just look at it per uh per capital, you're looking at it closer to nine percent. So if you're getting if you're drawing seven or nine percent and you're only getting nine percent growth, there's no room for escalations going forward. So that's a risk. So you have to look at right, how do we structure a portfolio where we can seek a little bit more growth? And this is one of the reasons that we actually brought hedge funds into the living and earthy space is to target a little bit more growth, but not taking on more risk. For example, you know, if you take um the uh the pure hedge, it's probably very similar in terms of volatility to a stable fund. But over 15 years it's probably giving you anything from two, three, four percent more. If you take the high growth fund, uh probably similar, you know, volatility to uh the balance fund industry, but over 15 years giving you three or four percent, maybe even more per annum. That's significant. And um, I highlighted that research uh by Yaqu at 91, where he spoke about if volatility increases from eight to fifteen percent in your portfolio, your risk of failure increases fourfold. So we have to keep the volatility down. And strangely enough, hedge funds help us to reduce volatility within portfolios.
SPEAKER_02And that's the key thing that we're focusing on, Alec and Voldu. I think obviously past returns are not a guarantee, obviously, of future returns. Um, and the key thing for us is that we're looking to manage that downside risk, manage that volatility. But also now, Voldu, to to bring you back into the conversation, we've spoken about call it the more institutional side of hedge funds, which is known as QIFs, okay? The the the investment funds and hedge funds that we are dealing with on a day-to-day basis are known as retail um hedge funds. Uh, the acronym is RIFS. How do listeners, viewers, and our clients, via us as Alec um and myself as financial planners, actually access these retail hedge funds? How easy is it to access the hedge funds? Are they daily priced? Are they liquid? Are they lockups, etc.? If you can just unpack that in a little bit more detail.
SPEAKER_00Yeah, I think let's address everything. Like there's no penalties to exit, first of all. Then it trades daily. So that's what a retail hedge fund does. Qualified hedge funds trades monthly, ours does. Back in the day, you had funds that traded yearly, maybe only twice yearly, by annual trading. So you had it was a pseudo-lock-in period where clients had to give notice. And like now, with the qualified funds, you need to give calendar months notice. And the only way to access those funds are actually directly via us. So it seems like it's admin, and I think that's where you guys kick in. Where when a client approaches you, you can say, Listen, I want to. I've seen Peregrine in the media, if I read something on Moneyweb, I want some money in this phone. And you can be like, Okay, here's a quote, here's all the Lisps that it's available on. The minimum is a lot less because it's dependent on what the Lisp says, and you can get your money depending on which bank you are quite quickly.
SPEAKER_02You have the key thing from a liquidity point of view with retail hedge funds, your your money, for example, if you're in a unit trust investment, the money could be paid, like you say, into your bank account within five to seven working days via a platform. If we access the hedge fund, the retail hedge fund directly, which Alec and I can, for example, directly via what we call a manco, it could be three to four working days. Um, but Volda also you spoke about Moneyweb. I'm just gonna give you a little bit of a shout out. Alec and I stumbled across an article uh that you wrote on Moneyweb yesterday, uh speaking about some portable alpha. We're not gonna go into those technicalities today. Um, but yeah, I think the key thing, and Alec and I are always speaking about this, Alec, is that our industry is always evolving, and we st we really are trying to stay ahead of the curve at the cutting edge, and things are moving really, really quickly. And the size of the industry, if you think Volder globally, I was reading some um some information that the hedge fund industry um currently is sitting at about 5 trillion US dollars. The local hedge fund industry is sitting at about call it 200 to 220 billion rand. And the key thing that Alec and I have also done some research on is there's some massive universities, specifically in the US, okay, where there's a lot of data available. The likes of Princeton, um, Alec and Please, Stephenia, Yale, Stanford, etc., that have got call it like 30% of their endowment fund or trust fund invested in hedge funds. Now, if you've got these really bright people and individuals making use of hedge funds, I think Alec, for me, that's like when the penny like really dropped, right? I like sat back and I thought, I saw and thought about it, I saw this graphic and I was like, wow, right? It's not taking things for granted. But if these people and individuals that are really smart have been investing for hedge in hedge funds for years, why are we not doing it?
SPEAKER_01So it's strange that they mentioned that because back in the early 90s I was doing the fundraising and marketing for the gray schools in Port Elizabeth, yeah. And um I I went overseas, actually set up in the old gray branch in America. Uh, we also set up a tax trust there where any American can donate to the gray schools right here in Port Elizabeth and get a tax deduction. But one of my key things that I had to do was to visit some of those top universities and some of the top schools, and it's quite amazing, you know, you talk about those endowment funds, and I was exposed to that and so forth. But what they do is 60% of their budget is run uh according to the actories. It's the legacy project. So they don't ask their uh alumni to donate now, they say, Can you include us in your will? And those actories work out exactly, and they've never been more than 3% out. 60% of those universities very often their budget is run from the legacy project. And they use these big endowments and so forth, exposure to hedge funds and things. So it was actually quite nice to visit and broaden one's horizon already way back then, 30 odd years ago, about you know the magnitude of things. You know, everything's big in America. I won't say better these days, but in the back in the days, we used to say bigger and better in America, but uh certainly bigger. So it's it's quite amazing to see you know what's out there in the world as well.
SPEAKER_00Yeah, like I I think about how these inclusions work, and obviously the US is a bit of a harbinger in terms of what happens in the industry. Regulation-wise, we always say like England doesn't, and then we just mimic them. But all the investment products that we are seeing are actually like usually started in the US. If you think about the ETFs, the PASIF funds, largest asset managers in the world manage PASIF funds, it's what black rock and thread needles. So you sit in a situation where you can see what the US does, and these large university endowments have obviously spent time with a lot of these hedge fund managers because all of them studied there as well. And if you move into this, we've had institutional investors in the past, and we've explored numerous offshore guys as well. Like, think about it this way the Norwegian Sovereign Wealth Fund has invested in numerous hedge funds, not just in the US. So it is an appealing product, but it also comes with a ton of bells and whistles because it's large institutions. What I do find now, and what we actually this is what our approach was, is we said we'd rather work with guys that we work with closely. So, yes, these guys sit in a situation where they say we can give you 30% of what we have in our endowment. These are the regulations, and then you then you adhere to them. But it's not just them. Remember, pension funds also do large allocation storage age funds. Unfortunately, in SA because of regulation 28, we're quite limited. Let's not start on that one. Um, otherwise, my RA would have been also 100%.
SPEAKER_01But maybe we can just touch on that for people who've got a retirement DOT, you know, and obviously one is constrained with the type of returns you can get by regulation 28. Uh, you know, the government limits you in terms of how much equities you can have, how much offshore exposure. They also limit you in terms of hedge funds. But there's an opportunity that I believe that 90 plus percent of people in retirement DOTs are missing. They can get up to 10% exposure to hedge funds in their retirement ERT. And I would encourage people to go and visit their financial planner, broker, advisor, and say, you know, can I get exposure to hedge funds in my retirement ERT? Again, more diversification, seeking more growth, probably reducing volatility, um, all positives, you know. So it might be a small percentage, but 10% is a lot better than nothing.
SPEAKER_00Yeah, Alec, and the personal hope that I have is like you both of you know the offshore limits back in the day, I think was 15%, if I'm not mistaken. We're sitting at 45% now. And my hope is that the regulator actually increases the H1 allocation as well. So hopefully R10 can go also go up to 45% at a later stage. And I think that's when it'll only happen. Once again, it's only my personal view is once there's trust in the industry. Something that I do want to touch on in terms of the trust, we're FSA approved, so you guys can invest in us. And a lot of the sad stories that we've what we've seen in the past in essay are people losing money in investment products that promise great returns, yeah, and there's always one common denominator, it's never FSA approved. And there's sad cases. You guys know this. Unfortunately, clients that draw too much income, or clients that don't have money at retirement, gamble, and they put money in these products on promises, and unfortunately, it always ends up in a sad way.
SPEAKER_01Well, we think of close to Port Elizabeth, we had the Maureen Clifford debacle, uh, we had uh AJ Brown at uh Fidentia.
SPEAKER_02And we're actually speaking about this just yesterday. Just yesterday, yeah.
SPEAKER_01So it's important that people realise, and I mean, I was relating yesterday to a to a client that back in 2008, uh a client I was introduced to, became a client, had sold a property in London and at 8 million Rand to invest, and was very nervous about investing this money. Where's my money going to be? You know, what are the regulations? And I went through the whole detail, and this is where the money needs to go to and so forth. And the next day, our receptionist phoned me and said, Alec, I've got a check here made out to you for 8 million Rand. But the client, he was an elderly client, and he'd forgotten what he'd asked and just thought you must give me the check. Fortunately, it wasn't made out to Maureen Clifford, otherwise, uh maybe the eight million Rand would be God. Would have disappeared most definitely. So I had to go back and get the check reissued, and uh yeah, I didn't uh shoot off to Mauritius. Imagine what eight million Rand would be worth today.
SPEAKER_00Jeepers. Yeah, I don't know, like I can't do the maths now. A substantial amount of money.
SPEAKER_01But it's important, you know, that those those that that trust factor, working through, you know, people who are FSCA uh compliant, um, working through accredited uh advisors, not only us, not only private wealth management, as we said last last uh episode as well. You know, we encourage clients to go and see, you know, people who are qualified in the industry and you know, and get professional advice because it can help a great deal. I just want to touch on a little bit something we haven't touched on is the uh you know the toolkit. So so let's talk about with hedge funds. So normally you would have, let's say, a balance fund, there's many balance funds out there, ungrade balance fund, PWM balance fund, coronation balance fund, etc. Now, essentially those fund managers are what we call long only. They need the market to go up for the clients and their funds to benefit. Within a hedge fund, we have there are more tools available, and you can perhaps elaborate.
SPEAKER_00Yeah, so obviously we can also go along. So we as mentioned in the CapTech example, you can just buy a share and go along and make money out of it. What the hedge funds actually bring to the table is instead of only being a stake knife, you've got a Swiss Army knife. So you can do short selling where you sell a share now at a high price, and once it falls to a lower price, you buy it back, so you make the profit almost backwards.
SPEAKER_01So that's what's the inverse of going long.
SPEAKER_00Yes.
SPEAKER_02So you can make money if the market goes up, but also if the money uh if the market goes down. And that's that's simply how I position it with clients.
SPEAKER_01So I look like and I think the important thing is there, you're relying on the performance analyst, right? And if they are good at the job, you're gonna do well. With a balanced fund, not knocking balance funds, they're great products and we utilize them. But there you can have the best fund manager in the world. But if there is a geopolitical event or some risk or something, he has no control over that. No, performance is out of their hands.
SPEAKER_00Yeah. Yeah, and I think if you touch onto something else that we can bring to the table, it's called a put option. Or actually just options. And it's uh the easiest way to explain is the right to participate in either up or downside. So if you want to participate into the upside, it's called the call option. If you want to participate into the downside, it's called a put option. And what that means is if the market goes down, you actually you've got a form of a pseudo-insurance policy there on your money.
SPEAKER_01Perhaps you can just mention um I seem to remember COVID, there was uh uh a great example you can bring in about uh about that.
SPEAKER_00Yeah, look, if you have a view of 2020 and our fund performances, the high growth did about 17, POH did about 12, JSE did 0.6, but that doesn't tell the real story. First three months of 2020, three of us know, everybody that's listening, everybody experienced that. So the market started dropping, and then what happened is our PMs portfolio managers realized that guys, the COVID lockdowns are gonna be imposed everywhere. And they decided over a weekend in Feb let's take out a put option on the SP 500, let's help our portfolios. And then March 2020, the JSE dropped 17%. The high growth, I think, was down one percent in the period was actually up a bit. So we mitigated that risk.
SPEAKER_01So that's the downside protection we spoke about earlier. The volatility, yeah.
SPEAKER_00Yeah, look, it's not a silver bullet, guys. And I think this is the big thing where it's always great hearing the good stories, but this is what we can do and where it has helped. Uh, a good example is we've had core options on the JSE like uh post-2024. So the GNU was announced, JSE started running, so we could participate in that. So that's a very nice thing to have as an arrow in your quiver, so we can do more with what goes on in the market, and we've done it, we've got a track record with it. So it's always fun to say, okay, we can do all these things, but have you actually done it? And I can actually say with honesty, yes, we have.
SPEAKER_01I think the important thing here is we're having a lot of fun talking about something we're passionate about, and time flies when you're having fun, and so we need to we could talk about this all day.
SPEAKER_02I've got one more burning issue, right? So hit the burning issue, and then we're gonna wrap up. Sorry to butt in. But I think the key thing, you former financial planner of the year 2009. We've got Mr. Bruce Fleming sitting in Cape Town. I think he was former financial planner of the year in 2016. We've got a couple of finalists up in Pretoria, Francois Leroux. We're fully transparent on this show. I know we're gonna get some questions on this. Fees and performance fees. Alec and I are very comfortable in positioning our fee as a financial planner, and we're also very comfortable in positioning the performance fee that is charged by hedge fund managers. But in a minute or so, please, Valdo, if you could just unpack performance fees and the performance fees that are charged by hedge fund managers, and then Alec and I will just step in and say this is the way we position it to our clients.
SPEAKER_00Okay, what I'll use is what's actually going on, let's say in the media, and if you watch, let's say you watch billions, they always talk about a two in 20. Yes. So you pay 2% per annum and then a performance fee gets charged of 20%. On top of that. Yes, but we don't charge that much, fortunately. Um, so high growth I'm gonna use as a good example. It costs you 1.73% per annum to invest in the fund. And that's the annual management fee. That is the annual management fee. Look, there's numerous other charges, but I'll skip past that. I just want to get into the performance fees. Perfect. We calculate it on a quarterly basis where we crystallize on what you call a NAR value. To make it simple, is if you start climbing steps, you can only pay yourself once we've exceeded the highest step that we were on. So, in all instances, clients will always receive 80% of the outperformance that we've given to them. In most instances, they actually receive a bit more because remember, funds go up and down. So that's the way that it works. And I think the misconception in the market is if you have a look at what uh the EAC or TIC is on an MDD, you look at seven or eight percent, let's say. Let's round it down to five. Then clients think okay. Am I paying five percent now to enter into the fund? That is not the case. So if you enter in our fund now, it's gonna cost you 1.73, and all the performance that you are receiving, you're gonna get at least 80% of. And remember, the EAC is calculated. Sorry, TIC's calculated backwards looking. So let's say you had one for uh over the last three years of seven percent and performance these was three. That means it was 20% of the outperformance. Okay, I'm rounding down a lot, so don't shoot me over the bad maths here. But the idea is is clients always receive better, but they receive 80% where we receive 20%. So we incentivized to actually give them proper growth.
SPEAKER_02Yeah, and I think the key thing, Voldo and Alec, there's a lot of noise around fees in general in our industry. Okay, you've just been fully transparent. We're not gonna go into the 12th decimal here, but the key thing is we've raised the point on the show, okay? Our viewers, our listeners, our clients. Like you spoke about the EAC. So it's called an EAC of 3%. That's what the client's paying. I'm just throwing a number out there. But we disclose that in every single meeting, Alec. I shouldn't say every single, but every single record of advice, every set of minutes that go out, every set of minutes that your PA Nikki types. I use Copilot for my minutes. The key thing is that we explain every single fee that our client is paying, and our clients are comfortable with that, folder. And that's the key thing out there in the industry. You go onto LinkedIn, there's certain comments posts, and there's a lot of comments from um other financial planners. But the key thing that it boils down to is understanding your value add, what we are trying to achieve with our clients, trying to get them over the line. What we are trying to achieve here with this podcast, we are informing people, we don't hide anything. There's full disclosure. Um, but maybe just in closing, Alexa.
SPEAKER_01So if you take, I mean, a year or two ago, the Peregrine High Growth funded uh, I think 22% for clients. So let's just call it 20. So they would have done 25 gross, kept 20%, and disclose and given the client 20. I had a discussion yesterday with uh a client, uh uh uh former EP rugby player, and we were talking about this, and he said, let's go if if we get 20%, I'm happy to give 4% away and uh and and receive 16. Um the point of the matter is all I always say this I would rather have 80% of a lot than 100% of a little. And generally hedge funds have, and as I say, it's not always going to be like that. Um, but if we take over a 10-year period, the law of averages and whatever the case is, you are going to get uh some great performance, some reduced volatility, and protection on the downside. Um, I see a lot of benefits uh to it. I haven't probably a hundred clients in in hedge funds. They they're not worried about giving away 20% of the of the performance. Yes, we would like the uh performance fee to reduce, so while do let us know when that's gonna happen. Um and I think it's also important to uh for for people to understand us as financial planners, we do not participate in that performance fee. There is no rebate or kickback or whatever, you know, we get nothing. We the only thing that uh us as financial planners or private wealth management get is the financial planning fee that we discuss and disclose and negotiate with clients.
SPEAKER_02And just to add to that point, Alec, we have a team at private wealth management that are engaging at call it an institutional level with the likes of Valdu's team at Peregrine Capital with regards to performance fees, performance in general. I also spoke about that hedge funder funds that we use. It's all about scale. But the key thing is that we are always engaging, we are always having constructive conversations, and we're always monitoring the space, be it performance, be it fees, to ensure that our clients are getting a appropriate and suitable solution.
SPEAKER_00Guys, if I could just jump in there, I think it's about merited inclusion, let's be honest. That's why I'm sitting here, that's why we've got a relationship. But something that's never mentioned about MDDs, and I get these questions, and you think, like, why am I getting this? But let's say it. Performance that you see on the MDD is always post fees. It's net of fees. Explain MDD for those that are. That's the minimum disclosure document. So fact sheet. Yeah, it's the fact sheet. Like you get one every month, you get a high growth one, you get a PH one. You guys receive it, and then you can see, okay, let's say the fund did 20%. Remember, the 20% is after the fee, so you don't have to go and look at the fee and deduct it again. Because that's sometimes it's confusing.
SPEAKER_01So every presentation we have, we uh only use the net fee uh in our net return, yeah. In our net return, yeah, our net return. Folks, I think we're gonna wrap up there. Um, this has been a really entertaining session for us, maybe a bit complex for some of our listeners and viewers. But I'd like to encourage you know, all of you out there, if you do have any questions, if you want us to elaborate on anything, you're welcome to to drop a comment on Spotify, Apple, or YouTube. Uh, please don't forget to to like so and and uh subscribe because we want to try and grow this podcast. We're passionate about this becoming a you know a much sought-after podcast, and we want to try and educate the hundreds and thousands of or millions of people out there who are looking to try and understand financial planning a little bit better, and you can help others by uh helping us to grow this platform. So thanks very much, Waldo. Thanks very much for your participation, we appreciate it. Thank you, Alec. And uh Andrew, once again, thanks. And our next episode is going to be a QA session where we've got a whole lot of questions that we are going to ask, uh covering a variety of topics, and uh so make sure you get your question in, and in the future we might be utilizing some of your questions. Thanks very much.