South African Qualified Investor Hedge Fund

RECM Flexible Value Prescient QIF

The fund has a strong value bias and a patient approach to finding the right opportunity. It uses a South African “hedge fund” structure, but a value strategy still requires a stomach for volatility: mispriced assets can take a frustratingly long time to correct.

The structure is deliberate, giving the widest possible investment universe in a tax-efficient vehicle. The opportunity set runs well beyond equities, into fixed income, commodities and currencies, with the use of derivatives.

The bulk of the fund is the personal wealth of the portfolio manager and associates, so investors are fully aligned with the manager.

Fees are set for the same alignment, and we pay them too: an annual fee of 1.0% (excl. VAT) and a performance fee of 20% of returns above the hurdle, measured on a rolling five-year basis. The hurdle is the JSE All Share Total Return Index + 2.5%, so by the time a performance fee is charged, investors have already outperformed the market.

Our objective is to generate medium- to long-term capital growth for investors through achieving attractive returns. As discussed in Our choice of benchmark, we measure our performance relative to the JSE All Share Total Return Index. Notably, the performance fee hurdle is the JSE All Share Total Return Index + 2.5%, i.e. we do not earn any performance fees unless that hurdle is beaten on a five-year rolling basis.

Our opportunity is to achieve this result through a structure with maximum flexibility. It has been set up to take advantage of the following:

• The legal structure of the investment entity (a South African Qualified Investor Hedge Fund) means that income taxes and capital gains taxes are deferred for an indefinite period within the fund.
• The relatively small size of the fund means we can make meaningful allocations to opportunities not available to larger investors, both from an impact and a timing perspective. We invest patient capital from an investor base with a long-term view and a three-month notice period for redemptions. This allows us to invest in less liquid companies that larger funds are forced to avoid.
• We do not trade for the sake of it. Churn is kept to a minimum, as we only transact when it makes sense to do so. We don’t ever have to do anything to justify the fund’s existence.
• As a management team, we are also involved day to day with a range of other businesses in South Africa, giving us on-the-ground information and experience of business conditions. This helps us source investment opportunities and understand the real underlying economics of most companies.
• The structure is able to make private or unlisted investments, which we execute sparingly and only where we have intimate knowledge of the underlying entity.

By operating through the right structure, we believe we have the optimal platform through which to execute our various long and short strategies across a broad range of asset classes.

Core strategies

The fund combines long and short strategies. There is no targeted allocation to any of them: capital goes where the opportunity is most attractive, and waits in cash when none is.

Who it suits

Qualified investors with a multi-year horizon who want a genuinely unconstrained, valuation-led mandate and who can tolerate a portfolio that looks unlike the index, including periods when it holds cash, or holds assets that are out of favour.