Moneyweb – WHAT is the difference between say, a general equity unit trust and a hedge fund? In a recently released hedge fund report, Peregrine Securities notes that the average South African unit trust derives some 93% of its investment performance from the market. In other words, only about 7% of the performance – both good and bad – of your equity unit trust investment can be explained by the fund manager’s active bets, a result of their skill, or lack thereof.

“This is no fault of the fund managers or the institutions themselves,” argues Peregrine Securities, “but is due to the constraints imposed on them by their mandates and regulatory bodies.” Of course, having such a large portion of your investment linked to the market is not necessarily a bad thing. History suggests equities comfortably outperform other asset classes in the long term.

The report then raises the primary distinction between these “long-equity” funds, and hedge funds. Typically, most of the return derived from hedge funds is “non market” (alpha). In other words, the return derived from hedge funds is mostly a result of the manager’s skill, or lack thereof.

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