Speaker 0:
Hello and welcome to this boutique connect. Today I'm joined by Alan Yates, head of distribution at Peregrine Capital. Welcome, Alan. Thank you for having me. So, Alan, perhaps we should paint a broad picture of the macro environment that we currently find ourselves in. And what's the role of hedge funds and specific strategies that you offer? Perhaps that Capital capital, uh, within the market that we find ourselves in.

Speaker 1:
So I mean, I think that the the the beauty of a hedge fund or the or the job we think of a hedge fund

Speaker 1:
is to bring diversification to a portfolio and to produce a return stream that is not accessible in other asset classes. And I think in an environment like this, where we have AAA difficult market hedge funds really need to kind of prove their worth and and and, uh, add value to to the overall portfolio. So in order to do that for us, it's a case of making sure we reduce the beater in the portfolio as much as possible that we're getting very stock specific ideas into our funds that we think are gonna out perform

Speaker 1:
and then to protect on the downside. And I think that part at the moment is critical. Absolutely

Speaker 0:
so. Everyone's talking about hard landings, possibly soft landings. What protection are you buying in the portfolio in the use of puts or perhaps direct shorts. So,

Speaker 1:
I mean, at the moment, we've we've probably got about 20% of our high growth fund covered in put options. Uh, we purchased those towards the beginning of the year when markets were obviously doing quite nicely. Bo was low. Um, and we'll certainly look to add to that if and when we can.

Speaker 1:
Um, I think running that sort of protection gives you two advantages. Number one is obviously, you don't suffer the drawdown, but number two is. You can then engage the market so much more rationally when when you want to put risk on when everyone else is kind of panicking. That gives you the opportunity. Absolutely.

Speaker 0:
So how do you build conviction in your in your, um, shorts, particularly if you're gonna employ direct shorts

Speaker 0:
when you have, uh, unlimited downside exposure.

Speaker 1:
So, I mean, I think we as a house tend to use the short book much more as an insurance policy than an Alpha generation tool. So, I mean, some hedge funds will certainly look to go big on the short side. I don't think that's really our model. So a lot of our shorts at the moment

Speaker 1:
are within the fair trade space. And where we do have individual short positions on, they're normally pretty small, to be honest.

Speaker 0:
So, Alan, then being a bit a smaller boutique hedge fund manager, how do you maintain flexibility in the constrained, um, local market universe? So

Speaker 1:
I mean, I think the honest truth is we've taken the view that

Speaker 1:
in order to generate real alpha in South Africa, you do have to kind of limit the size of your business. I think you know, I mean, if this was a global market and we were talking about investing in, you know, the S and P or something, you've got kind of unlimited liquidity, and that's fantastic. But South Africa obviously has liquidity constraints, and I think the the the appeal for us as a as a smaller manager and we I mean we are very small. We're sort of 15 u. M. Compared to most people on 1/10 of certain guys, balance fund.

Speaker 1:
Um, but it does give us that flexibility, and it means that we can look at opportunities otherwise others might not be able to or that otherwise just wouldn't generate any real return for them, even if they did look at it. So for us, we're seeing quite a few opportunities in the kind of mid cap space at the moment. It's a place we like to play. It's a place that we've been in and invested in for the last 25 years. We've got a lot of experience and understanding of those businesses. Um, but I think that flexibility element we talk about

Speaker 1:
the joy of being a a very unconstrained hedge fund manager is that you can change your mind and you can do it quickly, and you can do it quite aggressively. So I mean, to give you an example, kind of, uh, back when we were in in Feb and March of 2020 around covid. I mean, we we

Speaker 1:
took a view that that this was gonna get a lot bigger than than the market thought it was at the time. We bought put protection on, like, 80% of our funds in in one day, and the fact that we could do that was down to the fact that as it's a small team and they can interact very quickly and make decisions, but B, we are small enough to be able to do that,

Speaker 1:
and then you can cut the positions that you think are at risk. You're not sitting with big tail risk and and and the holdings that you've got to take, you know, weeks and weeks to get rid of. Um, so for us, I think that in a market like we're seeing now, which is pretty volatile, I think it is fundamentally so important that we can have the opportunity to change our minds

Speaker 1:
as and when information changes

Speaker 0:
nimbleness, so scale has it constrained you in any in any

Speaker 1:
way? Um so I look I mean, we talk about scale as I say we we're at 15. So it's not a particularly big number relative to everybody else. Um and no, I mean, it's not not not yet. I think what we do do as a business is we track all of our holdings and all of our investable universe as a percentage of liquidity on the jazz

Speaker 1:
see on a daily basis, and and certainly that is a metric we we pay a lot of attention to, because you do want I think that flexibility is a huge competitive advantage, and we want to keep that. And we will manage the size of the funds to make sure that we never lose that. OK,

Speaker 0:
so, Alan, then perhaps we can touch on the two hedge funds that, uh, manages and just take us through through the thinking behind their strategies.

Speaker 1:
Sure. So I mean, I think

Speaker 1:
the so the the oldest one is our pure hedge fund that's been around for coming on 25 years Now it will be 25 years next month.

Speaker 1:
Um, so and that is, I think, like the purest form of a hedge fund, if I can call it that. So it's a market neutral fund, very low net equity exposure. The intention of that fund is very much to be absolute return in nature. So it's It's a case of making sure that year in and year out we generate positive returns for investors in that in that product at the lowest possible volve very low, you know, drawdowns

Speaker 1:
and that the investors into that product are looking for consistency. Stability certainly returns that obviously beat inflation, you know? So I mean that that there is a return expectation, no doubt. Um, but just that you give it in the most stable and poss and and and consistent possible way. And I think that fund has done an incredible job of that. You know something? It's been going for 25 years. It's never had a negative year return year in its in its life span. Um, and we still managed to achieve, I think, kind of CPR plus three or four on on almost all measurement periods.

Speaker 1:
Um, then the second product is a high growth fund. That's very much kind of more in, in in in line with From an allocation perspective in line with the typical balance funds, we are gonna take more equity content there. Um, we are looking to generate exceptional returns over kind of a five year plus period. Um, but again, managing that that downside, you know, I think that that's what the hedge funds bring to the party here

Speaker 1:
that a long only fund might not be able to do And that's what our investors come to us. For it to say. We we are looking for that upside capture, particularly in high growth. We expect you to out form the market. But we certainly do not want to sit through big drawdowns, Um, as if we were in AAA. You know, a full equity, long only product. So, uh, it's a It's a tricky balancing act, but it's certainly, I think, one that the guys do well and I think that we own. The fact that we only run hedge is is means that they've honed

Speaker 1:
skill set. I mean, Dave, our founders still portfolio manager. He's executive chairman. He's been there since the very beginning. He's got 25 years experience running hedge funds. Uh, Jacque, our CEO has got 17 years running hedge funds, so I think they are specialists in what they do, and we've therefore taken the view not to ever run long only money in South Africa. And it's I think it comes back to the point we spoke about earlier where there is a limited pool of liquidity and we want those best ideas to be able to go into our

Speaker 1:
hedge funds at the waiting we want. And I think if you bring in a long only mandate, it dilutes that offering. And and so we we've stuck with, really? Just those two products.

Speaker 0:
OK, so hedge fund only hedge fund. Um so, Alan OK, so the accessibility for clients and advisors, I think that hedge funds have there's been a misconception of the risk inherent in in, in, in hedge funds. Perhaps you can unpack that for us.

Speaker 1:
Yeah, sure. So I mean, I I'll tell you when I when I joined the business, which is about four years ago, Um,

Speaker 1:
I didn't even know who per capital were, To be honest, I mean, we never website to find the the MD d SI had to kind of phone a friend to to before I had an interview with these guys.

Speaker 1:
Um, and I think that was the nature of the hedge industry. It was a very closed off, um uh, sort of cottage industry for for lack of a better word, populated by really, really intelligent, brilliant fund managers. But fund managers who have been running very much below the radar, and, uh and I think that was it was viable to a point, but a big change happened. Obviously when hedge funds got regulated, uh, and and incorporated

Speaker 1:
it C I s structures. Suddenly you had this opportunity where you could provide a fund that a retail investor a financial advisor could access. Um, but there were quite a lot of hurdles to get there, and and the first was obviously to make sure that they were available on platforms. Um, and that took, I mean, for the first two years of of my time at was really just trying to get us on to as many platforms as possible. Um,

Speaker 1:
once you've dealt with the platform issue, the accessibility issue is available. Um, and there was quite a lot of development work from the platforms to include hedge as an asset class. Um, so it wasn't the case of the guys simply saying flick a switch and turn it on That they did have to do and and I have to say, credit to to all the big platform providers, they did the work. They saw the value in in hedge. And and, uh, I mean, I think we're on every conceivable platform in the country now, which is fantastic.

Speaker 1:
Um, but then the second step of that is obviously you. There's an education role that has to take place. And, I mean, I'd say 90% of my job is to educate people about what a hedge fund is and what a hedge fund isn't. Um, because, as you say, I mean, there's there. There are a lot of misconceptions, you know what I mean? When when I started talking to people about hedge funds,

Speaker 1:
Um, I think the the first question you would tend to get is like, oh, like billions? No, definitely not like billions. Um, or there was a a sort of a, uh, a stigmatism that it was much like the American hedge model. And it is the South African model is actually very, very different, you know? I mean, if you look at some of the American hedge funds, it is running big exposures, big growth, you know, lots of leverage, and it really is kind of a six and out mentality. Whereas I think the South African industry is significantly more conservative.

Speaker 1:
And as I say, investors come to us to protect on the downside to reduce their risk. You know, If any of our clients saw us taking outsized bets and and adding loss, leverage portfolios, I think we'd lose clients very, very quickly. And for us, that's not the value of of of hedge. So it's it's It's been a bit of a journey going out and actually getting that that message across and and getting people just comfortable with what a hedge fund is and what a hedge fund isn't. But I think we're we're getting there.

Speaker 0:
So

Speaker 0:
what has been the interest in in the two hedge funds over the recent past? What are the flows looking like?

Speaker 1:
So So, yeah, I mean, the the answer is it's been, um it's been fantastic to see the the the uptake from particularly sort of the financial advisory community. I think the penny began to drop for a lot of guys. Maybe, you know, uh, 18 months ago,

Speaker 1:
um, particularly during the the kind of covid experience when guys were were really battling to find good returns for their clients. Um, and they saw the dependability of these these products and they saw the consistent kind of return profiles. Um, and I think we've had a huge interest from from advisor. I mean, honestly, miles above what my wildest dreams would have been, which is fantastic.

Speaker 1:
Um, and I think, I mean, a year like last year as an example again, guys where you know, your traditional kind of buy and hold strategies obviously are dependent on markets going up to to generate those returns for you

Speaker 1:
and in a difficult market like that, you're not getting that outcome. Um, whereas with the hedge products you were, you know? I mean, I think both of our funds were up kind of decent double digits last year, and I think that that's the value add we we bring to to the overall portfolio construction process for advisors. And, yeah, it's been fantastic to see the the amount of interest and uptick and, um, the amount of buy in from from the community. It's been lovely.

Speaker 0:
Alan, thank you very much for the update. We appreciate your time