Not All Brown Bears are Grizzlies – Just Like Not All CIS Funds Are the Same

Grizzly bears, a subspecies of the brown bear, may resemble their relatives, yet subtle differences in size, diet, and behavior afford them unique advantages. This analogy is also applicable to hedge funds.

Though hedge funds fall under the umbrella of collective investment schemes (CIS), their operational mechanics diverge notably from traditional long-only funds, and these differences are essential. Understanding how hedge funds operate and why they were historically difficult for individuals to access illuminates their growing significance as an investment vehicle today.

Just as the grizzly bear is celebrated for its agility, adaptability, and resilience, hedge funds exhibit distinctive features that justify their uniqueness.

Let’s explore how this distinction is pertinent for you as an investor.

Hedge funds: Distinctly structured

In 2015, hedge funds were officially designated as CISs under the Collective Investment Schemes Control Act (CISCA). This regulatory shift improved both transparency and accessibility.

However, just as the grizzly bear cannot be solely defined by its classification as a brown bear, hedge funds surpass the conventional CIS characterization. Their behaviors and foundational structures create significant distinctions.

A wider array of tools – diversifying returns while protecting your capital

As grizzlies pursue a diverse diet by foraging beyond the coast, hedge funds employ a broader spectrum of investment strategies.

While long-only unit trusts typically use a buy-and-hold strategy with shares, bonds, and property, hedge funds utilize a comprehensive toolkit designed for capital protection and return generation in both bullish and bearish markets.

These strategies include:

• Short selling: Gaining profits during asset price downturns.
• Options and derivatives: Tools for risk management and return amplification.
• Event-driven and special situations: Tactics that exploit temporary market inefficiencies.
• Pair trading: Profiting from performance gaps between similar firms.

Why this is important

Hedge funds are not constricted to following market trends. They adapt to various market conditions, just as a grizzly adjusts its behaviors to shifting environments – providing more flexibility and consistency for investors.

Emphasizing absolute returns over mere index outperformance

Most traditional funds aim to beat an index—even if that index is falling.

In contrast, hedge funds maintain a different approach by focusing on absolute returns, striving to grow your wealth regardless of broader market performance.

Why this matters

Your financial goals should be assessed in real terms – actual currency – rather than solely by relative measures. Similar to a grizzly preparing for winter, hedge funds emphasize outcomes that are significant in real life: protecting and growing capital under all circumstances.

Low correlation with traditional assets – true diversification

Grizzlies do not follow the same patterns as coastal bears, and hedge funds do not consistently mirror the movements of stocks or bonds.

Why this is vital

In turbulent markets, hedge funds can act as buffer agents. Their low correlation with traditional asset classes contributes to smoother returns and bolsters your portfolio’s resilience during downturns.

Once challenging to access – now available to individual investors

Finding a grizzly in the wild once required an expensive expedition to North America. Similarly, accessing hedge funds previously demanded institutional connections or intricate investment strategies.

Today, that landscape has transformed.

Why this is important

Hedge funds, including those at Peregrine Capital, are now accessible through all major linked investment service provider (LISP) platforms. They have become essential for savvy financial advisors who recognize the value hedge funds bring to their clients. Improved accessibility and significantly lower minimum investments make it possible for private investors to leverage strategies once reserved for institutions and professional asset managers.

Compact industry size – focus and agility

Grizzlies thrive in environments requiring nimbleness and focus. Similarly, hedge funds in South Africa form a relatively small industry (around R80 billion compared to over R2 trillion in long-only CIS), which can work to their advantage.

Why this is important:

Smaller fund managers often exhibit greater agility. They can quickly seize overlooked opportunities and sidestep the risks associated with larger institutions’ operations, offering investors specialized expertise.

Why should this matter to you?

Because hedge funds are designed differently, they behave differently—leading to potential for superior outcomes:

• More stable returns
• Enhanced protection against downturns
• Effective diversification
• Access to leading strategies
• Alignment with real financial objectives

In a marketplace marked by rising volatility and complexity, hedge funds represent a more adaptable and resilient investment strategy. They are no longer solely for the ultra-wealthy – and they are increasingly essential in modern portfolios.

PS: No bears were harmed in the creation of this article.

Waldo Booysen is an investment specialist at Peregrine Capital.

Peregrine Capital (Pty) Ltd is an authorized financial services provider.

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