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Squaring. the Circle. Medical Schemes: Investing in a new asset class Theron van Wyk, Managing Director TriAlpha Investment Management (Pty) Ltd 24th July 2007. The BHF Southern African Conference 22-25 July’07 Sun City. Squaring. Contents. the Circle.

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Squaring

Squaring

the Circle

  • Medical Schemes: Investing in a new asset class

  • Theron van Wyk, Managing Director

  • TriAlpha Investment Management (Pty) Ltd

  • 24th July 2007

  • The BHF Southern African Conference 22-25 July’07 Sun City


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    Contents

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    • Introduction to the Hedge Fund Industry

    • How relevant are Hedge Funds for Medical Schemes?

    The BHF Southern African Conference 22-25 July’07 Sun City


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    What are Hedge Funds?

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    Traditional Investments (e.g. equities, bonds)

    Hedge Funds

    Investment Objective

    Absolute Real Return

    Outperform a market benchmark

    Primary Source of Returns

    Market Based

    Manager Skill

    Investment Constraints

    Flexible

    Long Only

    Manager Compensation

    Based on AUM & Performance

    Based on AUM

    Fundamentally different

    The BHF Southern African Conference 22-25 July’07 Sun City


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    Growth of Emerging Markets Hedge Fund Industry

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    Source: Hedgefund.net

    The BHF Southern African Conference 22-25 July’07 Sun City


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    Growth of South African Hedge Fund Industry

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    The BHF Southern African Conference 22-25 July’07 Sun City


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    Contents

    the Circle

    • Introduction to the Hedge Fund Industry

    • How relevant are Hedge Funds for Medical Schemes?

    The BHF Southern African Conference 22-25 July’07 Sun City


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    Conundrum for Medical Schemes

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    • Medical inflation has exceeded general inflation

    • Due to nature of liabilities a significant portion of assets are held in cash-related assets

    • Returns on most cash-related assets are not competitive in inflation-adjusted terms

    The BHF Southern African Conference 22-25 July’07 Sun City


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    Can Hedge Funds assist in addressing this challenge?

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    NO

    • If Hedge Fund is part of volatile/risky section of Hedge Fund universe

    • If it is a single strategy Hedge Fund

    • If the liquidity is too low

    YES

    • If Hedge Fund is part of low risk/”cash enhancers” part of hedge fund universe

    • If it is a multi-strategy Fund of Hedge Funds

    • If the liquidity good

    The BHF Southern African Conference 22-25 July’07 Sun City


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    Generic Profile of ideal Hedge Fund solution

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    Performance

    • Cash + 2% over any rolling 12 months (net of fees)

      Risk

    • Annualised volatility of 50% of ALBI volatility

    • Maximum drawdown 5%

    The BHF Southern African Conference 22-25 July’07 Sun City


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    South African Regulation

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    • Hedge Funds are structured in various ways

    • Degree to which a Medical Scheme can invest depends on structure

    • Most common structure for local fund of hedge funds: Unlisted Debenture

    • In this case up to 5% of assets can be invested

    Extract from Annexure B of Reg.30 of the Medical Schemes Act

    The BHF Southern African Conference 22-25 July’07 Sun City


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    Conclusion

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    • Hedge Fund industry well established and used by institutions internationally

    • SA Hedge Fund industry, although newer, following global growth path

    • Right type of Hedge Fund can be an additional tool for Medical Schemes to enhance cash returns without significantly increasing portfolio risk

    The BHF Southern African Conference 22-25 July’07 Sun City


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