Five-year record for X-Chequer’s flexible fund – HedgeNews Africa – September 2016

Fund focuses on compounding absolute returns with flexible directional exposure to equities, says manager Walker Naude

Authored by HedgeNews Africa

X-Chequer Fund Management’s Flexible Long Short Fund has reached the five-year mark, with an annualised net return since inception of 15.1%.

The fund launched in September 2011 with Walker Naude as fund manager, based in Johannesburg, assisted by Wayne Gray and Leonard Steenkamp. Gray has been co-managing since inception while Steenkamp joined two years ago. The team benefits from working with the broader X-Chequer team, sharing ideas with the fundamentally focused market-neutral managers based in the Cape Town office.

The fund was launched as a variation of the longstanding X-Chequer Long Short fund, following a request from an investor for a fund that would trade more flexibly and in a slightly wider universe of stocks than the more prudently managed Long Short fund.

Naude believes the fund is uniquely positioned in the South African long/short space in that it has a strong focus on compounding positive absolute returns despite having flexible directional exposure to equities. “The fund aims to deliver real returns over the medium term and, with the ability to hedge, preserving capital is paramount in our process,” he says.

He notes that the fund has had a maximum cumulative drawdown of only 2.4% over the past five years, with no extended drawdown periods. Its absolute focus is further illustrated by the fund’s high Sharpe ratio of 1.8.

The fund has had a good start to year with a net gain of 10.9% to the end of August, and no negative months.

“We are not a directional long-biased fund,” adds Naude. “If we don’t believe shares show meaningful upside given the risk, we don’t invest.”

Naude says the team has been negative on equities for the past two years and, as a result, the fund’s average net equity exposure has been relatively low.

“The figures show that investors have not been rewarded meaningfully enough to invest in equities over the past two years,” he says, noting that cash has returned a compound 13% over the period, while equities have gained a cumulative 14%. This equates to a mere 0.5% outperformance of equities over cash per annum. He adds that the long-term equity risk premium for South African equities is probably around 5%, reflecting the excess return that investing in the stock market provides over a risk-free rate, compensating investors for taking on the relatively higher risk of equity investing.

Naude says the team remains cautious on equities but has seen sector rotation as the biggest driver of returns more recently. For example, despite resources counters rallying hard year to date, he believes there is still significant upside risk to their earnings forecasts based on spot commodity prices. “Most of these companies are generating strong cash flows at the moment and we are bullish, for example, on BHP-Billiton and Glencore,” he says. “We are watching
the US dollar price of gold closely, as this led commodity prices higher and any weakness will be used as a sign of caution.”

The team believes two main factors are influencing the market environment at present. The first was uncertainty around a US interest-rate decision, with the US Federal Reserve meeting on September 21, and the second was domestic political uncertainty. Both factors have significant influence on the South African rand, driving the market’s short-term focus.

“Longer term, we believe that as global growth recovers, emerging markets will likely continue to outperform and the rand will be a beneficiary,” he said.

X-Chequer’s long/short unit manages a combined R1.1 billion in two long/short funds, with remaining capacity of approximately R400 million.

The team also manages bespoke specialist mandates in collaboration with investors.

The funds transitioned to collective investment schemes (CIS) fund structures on the IDS manco platform on August 1, 2016. The original X-Chequer Long Short Fund is open to retail investors and the Flexible Long Short fund is a qualified investor fund.

The original X-Chequer Long Short Fund launched in June 2008, delivering a net annualised 14.13% since inception. Copyright. HedgeNews Africa – September 2016.
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