Hedge funds move into the mainstream

Amplify’s Wade Witbooi says hedge funds are increasingly being used as portfolio construction tools, helping investors diversify sources of return, manage risk and navigate more complex markets.

“The way investors and advisers think about hedge funds has changed in recent years,” says Wade Witbooi, Managing Director of Amplify Investment Partners. “Rather than viewing them as high-risk products, they are being seen as tools to build more robust portfolios.”

The regulatory framework for retail hedge funds was introduced in South Africa in 2015, bringing these funds into the collective investment scheme environment.  However, the shift in market understanding has been more noticeable in the past five to six years as more industry participants have entered the space, financial advisers have become more familiar with the products and access has broadened.

INVESTING IN MORE THAN ONE DIRECTION

For Witbooi, one of the important hedge fund differentiators is that they can invest in more than one direction. While traditional long-only funds typically benefit when markets rise, hedge funds may also use tools such as short selling to express a view when markets fall or when securities are mispriced.

But this does not mean all hedge funds behave in the same way. Some managers may thrive in volatile conditions because volatility creates dispersion and trading opportunities. Others may behave more like traditional funds, depending on their mandate, strategy and portfolio construction.

MANAGER SELECTION IS IMPORTANT

This makes manager selection and strategy assessment particularly important. Some hedge funds may have low correlation to the broader market, while others may have higher correlation. Understanding the return drivers, risk profile and role of each fund is central to using hedge funds effectively.

Witbooi says one of the persistent misconceptions is that hedge funds are opaque, speculative or casino-like investments. In his view, the word ‘hedge’ remains important. At its core, a hedge fund should be understood as a strategy that can provide protection against what is happening elsewhere in a portfolio.

For Amplify, the focus is on repeatability of investment performance, established track records and the quality of the investment teams behind each strategy. Witbooi says the business does not simply launch hedge fund strategies from scratch. Instead, it partners with specialist managers who already have tested processes and demonstrated an ability to generate returns over time.

Amplify offers nine hedge funds, each following a specific strategy. These form part of a broader range that includes local and global long-only funds. Witbooi says the partnership model allows Amplify to identify skilled managers and make their expertise available to a wider South African investor base.

CAREFULLY MANAGING CAPACITY

As hedge funds become more accessible, the industry will need to manage capacity carefully. Witbooi points out that scale can become a constraint in active investment management. The more money a manager has to manage, the harder it be to move quickly and exploit inefficiencies.

“In investment management, scale is traditionally thought of as the enemy of alpha,” he says.

This is particularly relevant in strategies that rely on identifying anomalies or mispricing in the market. If a fund becomes too large, the manager may become less nimble, and the ability to generate the same level of alpha may be reduced.

THE CHANGING INVESTMENT LANDSCAPE

Technology and artificial intelligence are also changing the investment landscape, but Witbooi cautions against viewing technology as a source of automatic advantage. If many managers adopt similar tools, the competitive edge can narrow. The differentiator remains the ability to identify and act on mispricing faster and more effectively than others.

He describes the future as a combination of human and machine: technology supported by human judgement, institutional memory and investment experience.

ESG considerations also apply differently to hedge funds. Governance is often the most relevant component, particularly because hedge fund managers can use short selling to express a view on poor governance, accounting anomalies or corporate mispricing.

THE FUTURE OF HEDGE FUNDS

Looking ahead, Witbooi expects hedge funds to continue becoming part of the mainstream investment conversation. As passive investing grows and traditional markets become harder to beat, investors are increasingly looking for diversified sources of return.

For retirees and income-drawing investors, this may be particularly important. Volatility and sequence risk can affect portfolios at precisely the wrong time. Used appropriately, hedge funds may provide diversification and help reduce reliance on one direction of market movement.

The message, Witbooi says, is not that hedge funds are suitable for everyone, or that all hedge funds are the same. They need to be considered within a proper financial planning and portfolio construction context.

ABOUT WADE WITBOOI: BRINGING CLARITY TO COMPLEX INVESTMENT DECISIONS

As Managing Director, Wade Witbooi leads the strategic direction of Amplify, fostering relationships with investment managers, partners and clients while guiding the continued growth of the business. With a background in investment management and portfolio construction, he combines investment insight with long-term thinking to help shape Amplify’s vision and approach. Qualifications: B.Com, PGDIP Financial Planning, CIPM®, CAIA®

The changing role of hedge funds

Investors are navigating a world in which uncertainty has become part of the landscape rather than an occasional disruption. Inflation, interest rate shifts, geopolitical tension, volatile commodity prices, technology-driven market cycles and rapidly changing news flow continue to test traditional assumptions about portfolio construction.

Against this backdrop, alternative investment strategies are attracting renewed attention. Hedge funds, in particular, are increasingly being considered not as fringe or speculative investments, but as specialist strategies that may help investors manage risk, diversify return sources and respond more flexibly to changing market conditions.

IT’S NOT ONE SIZE FITS ALL

The South African hedge fund industry has also changed significantly over the past decade. Greater regulation, improved transparency and broader access have helped move these strategies closer to the mainstream investment conversation. At the same time, investors and advisers still need to understand that hedge funds are not all the same. Different strategies can play very different roles within a portfolio.

In this feature, Amplify Investment Partners’ Wade Witbooi discusses the broader evolution of hedge funds as portfolio construction tools, while Fairtree’s Kamini Naidoo considers the role of multi-strategy hedge funds in helping investors navigate complexity, volatility and uncertainty.