Finding a fund size that works

Yes, several of South Africa’s R1 billion-plus funds (around $140 million) battled when the markets hit the skids. But two years on, many of the country’s bigger funds have managed money successfully right through the credit crunch and ensuing global financial crisis. And while it has been a cycle of consolidation, certain funds have now achieved meaningful scale, having been of insignificant size two years ago.

But managing growth while maintaining returns is a question on the mind’s of investors and managers everywhere. It’s a delicate balancing act that, if not handled correctly, can have disastrous consequences, particularly when market conditions prove challenging for an investment strategy.

According to Meredith Jones at Barclays Capital in New York, managers need to have a growth plan in place – and stick to it. Most strategies don’t have unlimited capacity, and managers must be mindful of size right from the start – including deciding when they will need to add extra staff. (click here for the full interview).

Jones also notes that average fund sizes have come down across the industry – and more investors these days are willing to look at funds of under $100 million in assets (after a flight to big-name funds in recent times).

That’s positive news for managers based in our universe – where in the past foreign investors have been put off by the relatively small scale of African funds.

Amid the global hunt for yield, investors are being creative about where and how they allocate capital.

“The days of seeing five managers and giving them a billion each to manage for life are over,” one industry player commented recently. “Investors are keenly interested in maximising returns. They are looking at new managers and new markets and new ways of constructing portfolios.”

So while we have seen a few big hedge fund launches offshore this year combined with a flight to quality, investors also know that funds often enough outperform in their first two years, when they are naturally smaller. Allocation policies need to accommodate early-stage opportunities.

Building a long-term sustainable business while maintaining the mindset of a nimble boutique manager is part of the challenge for hedge funds. And having the right team in place is critical in today’s landscape – both from an investment and an operations point of view.

This month’s news of two respected managers joining Cape Town’s X-Chequer group is a sign of the kind of alliances that can bring significant advantages to a boutique business over time.

Teaming up, rather than going it alone, has been very much part of the local landscape this year and stands to make the industry a stronger, more effective force in years to come.

Given that backdrop, there is certainly an argument for managers with successful long-term track records and strong investment teams to manage bigger pools of capital over time, particularly as the markets grow and evolve.

In South Africa, in particular, the hope is that long-awaited regulatory changes, now anticipated early next year, will bring increased opportunity for talented managers to grow.

“It’s been a very tough market but when we look back over five years, our long-term business plan and what we told clients we were aiming to achieve when we launched has worked out as we had hoped,” one successful South African manager told us recently.

That kind of track record should be a recipe for ongoing success.

Indeed, there is no routine answer when evaluating the optimal size for funds – it can really only come down to investment case, manager skill and the state of the markets. CopyrightHedgeNews Africa – November 2010

Gwyneth Roberts