Hedge fund eyes opportunities in South Africa

Decillion Fund Management (DFM) was one of the first companies to launch a hedge fund in South Africa. Andre Malan, a member of the initial investment team, first became involved in the hedge fund industry in January 1999 when Decillion launched the Big Rock Fund and he was appointed as one of the fund managers.

Malan has been involved in Decillion Fund Management since its inception and was made an executive director in April 2004. In November 2003 he started the Fairtree Capital Fund and has been managing that ever since. The fund was positioned as a market neutral fund.

Malan and Nel launched the Fairtree Capital Long/Short Equities Fund in August 2007. The Fairtree Capital Market Neutral Fund re-opened for investment soon after. To increase research capacity, three investment professionals joined the company in 2008.

The Fairtree funds have consistently produced top-quartile performances over the last five years. "The funds are managed by a team with a combined investment experience of more than 20 years. The track records of the funds rely on a robust and repeatable investment process that supports a unique investment strategy," explains Nel.

"Long-term investments are based on fundamental knowledge of stocks and economic environment. Medium and shorter-term opportunities are based on fundamental valuation knowledge. The risk-management system guides investment decisions," says Nel.

Economic trends coupled with valuation inefficiencies in the South African stock market present multiple alpha opportunities for both funds. Stocks with deep fundamental value are trading at significant discounts and Nel believes there are "exciting" new themes emerging.

Nel expects the South African economy to recover much quicker than Europe and will probably experience a shorter recessionary period, if at all. Overall, he believes recent market volatility has created multiple relative value opportunities.

"Stocks with fundamental value are trading at significant discounts at the moment, this therefore makes relative value opportunities available to us more than ever," Nel adds.

Investments are grouped into five categories. These include buffet trends, which are robust business models that consistently outperform the market during different economic cycles and with no time horizon. Macro themes include investment opportunities presented by prevailing and expected economic conditions with a three-to-12 month investment horizon. Intra-sector pairs follow a three-to-six month horizon and consist of matching-pairs trading. X-sector pairs are cross-sector matched pairs with the same three-to-six month horizon. Trading opportunities include short-term extreme directional opportunities usually presented with a time horizon of days rather than months.

Macro themes make up the majority of trade ideas in both the long/short and market neutral portfolios. These include global, industry, commodity prices and exchanges and interest rates. n