Hedge Funds in South Africa: Myths, half truths and truths AIMA Media Briefing

AIMA – a new manifesto Regulate the industry De-bunk the myths of hedge funds Grow assets under management

Introduction to AIMA A global association in 47 countries (1200 corporate members). Established in 2003 after hedge funds had been in SA for five years Achieved first major milestone in 2007 with Hedge Fund manager regulation.

For discussion Myth 1 - the current landscape Myth 2 - returns v risk UK/Europe/the world (more sizzle than steak) SA (all steak and no sizzle) Myth 2 - returns v risk Less risky than long-only equity investing Better returns Not only about equities

The retirement savings industry comparison 97% of Global Pension Market Equities : 42% Fixed interest : 40% Hedge Funds, : 18% real estates, commodities and private equity RSA industry Equities : 75%* Fixed interest : 8%* Cash : 17% (Including cash) *Hedge Fund Retirement Asset Estimate: 1.3% with assets in the region of 18.2bn. Source: Alexander Forbes Survey, Merryl Lynch and Watson Wyatt

2 Year Performance Analysis   2 Year 2008 2007 Annualised Return  Volatility ALSI -8.5% -23.2% 19.2%  17.5% Cash 22.2% 11.7% 9.4%  0.6% Fund 1 56.4% 40.0% 9.5%  Fund 2 52.7% 16.0% 31.6% 4.1%  Fund 3 45.3% 14.2% 27.3% 6.7%  Fund 4 43.5% 8.3% 32.4% 6.5%  Fund 5 38.1% 20.2% 14.9% 5.1%  Fund 6 36.9% 5.0% 33.1% 10.2%  Fund 7 35.1% 17.5% 15.0% 3.6%  Fund 8 33.6% -5.1% 40.8%  12.1% Fund 9 19.4% 11.9% Fund 10 32.3% 20.5% 9.8% 3.2%  Fund 11 12.4% 17.7%  5.0% Fund 12 29.3% 15.6% 11.8% 4.7%  Fund 13 25.9% -2.2% 28.7% 3.3%  Fund 14 25.8% 12.5% 3.5%  Fund 15 24.8% 1.3% 23.2%  6.1% Period: 2 Years Ended 31 Dec 2008

The benefits of hedging Allan Gray Equity vs. Allan Gray Optimal * * 1 Feb 2008 – 31 Jan 2009 +15.4% -4.7% Data Source: MoneyMate Alpha Asset Management Research, 2009 * Includes dividends re-investment

The benefits of hedging continued but… Allan Gray Equity vs The benefits of hedging continued but… Allan Gray Equity vs. Allan Gray Optimal * * 1 Feb 2006– 31 Jan 2009 +35.3% +29.6% Data Source: MoneyMate Alpha Asset Management Research, 2009 * Includes dividends re-investment

Hedge Funds in South Africa: WHO are the players? +/- 100 licenses granted by the FSB under FAIS Act, 2002 Allan Gray/Orbis Investec Coronation RMB Old Mutual Sanlam Cadiz Peregrine Oryx Visio …and 90 other managers Total Industry = R55bn R29bn R26bn

International trends say AUM of the local hedge fund industry should be 4x to 8x current size or between R120 – R240 billion

RSA – world leader in risk management Source: Alpha Asset Management Research, 2009

Risk mitigation driven by the Fund of Hedge Fund players Alpha Blue Ink Brait Clade Edge Legae Orange Sygnia Symmetry Trialpha

Fund of Funds Managing the Risks Position Size Concentration Liquidity Exposures Volatility Fund 1 Fund 2 Fund 3 Fund 4 Fund 5 Fund 6 Fund 7 Fund 8 Fund 9 Fund 10 Fund 11 Fund 12 Fund 13 Fund 14 Fund 15 Fund 16 Fund 17 Fund 18 Fund 19 Fund 20 FoHF 1 FoHF 2 FoHF 3 FoHF 4

RSA vs. Global Hedge Fund Industry Transparency Excellent Self regulated industry leader Are proposing going this route Liquidity Line of Sight of Underlying Position Excellent 70% of managers reporting daily Independence FoHF insist on independence Moving there but not yet industry standard

Making risk mitigation a requirement for regulation AIMA meeting with FSB on 24 March in collaboration with ASISA to propose institutionalised risk mitigation

WHAT is a Hedge Fund actually? A fund that can go short (either through selling an index or borrowing shares and selling those in the market). A fund that can invest more than 100% of it’s capital.

Myths about shorting and leverage (gearing) Portfolio Assets Counters Average Position Size Long Book R60m 30 Counters 2.0% Short Book Cash Holding Invested Capital R100m Less Long Book -R60m Plus Short Sales +R60m Total in cash Gross Exposure Long Book R60m Short Book -R60m Total R120m 120% Net Exposure Long Book R60m Short Book -R60m Total R0m 0% Source: Alpha Asset Management Research, 2009

Hedge Funds in generally positive markets Long-only Manager Hedge Fund manager R43.36 R38.70 January ‘08 Assets Liabilities Assets Liabilities R1.00M (26K SHP shares) R1.00M (26K SHP shares) -R1.00M (22K JDG shares) R1.00M (Cash) R45.15 May ‘08 Assets Liabilities Assets Liabilities R33.94 R1.10M (26K SHP shares) R1.10M (26K SHP s hares) -R0.75M (22K JDG shares) R1.05M (Cash) Profit: R0.1M (10%) R0.4M (40%) Source: Fairtree Capital, 2009

Hedge funds in generally negative markets September ‘08 Long-only Manager Hedge Fund manager Assets Liabilities R1.00M (17K IPL shares) -R1.00M (292K SPG (Cash) December ‘08 R0.88M -R0.33M R1.05M -R0.12M (-12%) P&L: R0.6M (60%) R60.50 R53.14 R3.42 R1.14 Source: Fairtree Capital, 2009

Regulated Hedge Fund says it’s good for grannies, too As per Fund Fact Sheet Suitable for those investors who: Seek absolute returns regardless of stock market trends. (Positive returns always). Are risk averse and require a high degree of capital stability. Are retired or nearing retirement. See the diversification benefits of uncorrelated returns relative to shares or bonds. Wish to diversify a portfolio of shares or bonds. Wish to add a product with an alternative investment strategy to their overall portfolio. Actual Current Fund Structure (A Hedge Fund) Equities (long positions) 76% Hedging (shorting) -70% Gross Exposure (>100% of capital invested) 146% Net Exposure 6% Source: Allan Gray Optimal Fund Fact Sheet

Long Term Performance History Broad-based FoHF vs Long Term Performance History Broad-based FoHF vs. Regulated Hedge Fund (CISCA) * 1 Mar 2003 – 31 Jan 2009 +100% +72% *Dividends re-invested at ex-dividend date Data Source: MoneyMate, Independent Data Services Alpha Asset Management Research, 2009

Performance Statistics Broad-based FoHF vs. Regulated “Hedge” fund 1 Mar 2003 – 31 Jan 2009 FoHF CISCA “Hedge” Fund Cumulative Return 99.8% 72.1% Annualised Return 12.4% 9.6% Average Monthly Return 1.0% 0.8% Annualised Std Deviation 3.0% 2.5% Sharp Ratio (Rfr 10%) 0.80 -0.15 Information Ratio 4.10 3.81 % Positive Months 90.1% 88.7% % Negative Months 9.9% 11.3% Largest Monthly Decline -1.4% -0.8% Worst Peak-to-trough Decline 2003 Mar – Dec 13.0% 10.9% 2004 10.5% 4.3% 2005 15.5% 9.0% 2006 14.9% 8.4% 2007 14.2% 9.5% 2008 4.6% 12.3% Source: Alpha Asset Management Research, 2009

Same principle applied globally and FSB-registered for sale in S.A. Fund Objective The fund seeks capital appreciation in US dollars on a low risk global portfolio. Fund Structure (A Hedge Fund) Equities 85% Hedging (shorting) -69% Gross Exposure (> 100% of capital invested) 154% Net Exposure 16% Orbis Optimal fund – one fund – larger than the entire industry in SA, ($2.8 billion / R30 illion) Source: Orbis Optimal Fund Fact Sheet

3 Year Performance History Orbis Global Equity vs. Orbis Optimal * 1 Mar 2006 – 28 Feb 2009 (Dollars) +6.5% -32.3% * Includes dividends re-investment Data Source: Orbis Mutual Funds Alpha Asset Management Research, 2009

5 Year Performance History Equity L/S vs. ALSI & Equity Unit Trusts Data Source: AfricaHedge, I-Net Bridge, Micropal Alpha Asset Management Research, 2009

South African HF Composite 5 Year Performance History Data Source: AfricaHedge, I-Net Bridge Alpha Asset Management Research, 2009

Regulated environments Unit Trusts - Collective Investment Schemes Control Act, 2002 Investment Insurance Policies - Long Term Insurance Act,1998 Variable Rate Debenture - Companies Act, 1973 Trusts - Trust Property Control Act, 1988

The question is not WHY but rather WHY NOT have a choice hedge in the mainstream?

Good regulation is good for business AIMA SA determined to lead from the front