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

Grizzly bears, a subspecies of the brown bear, might resemble their relatives, but subtle differences in size, diet, and behavior give them unique advantages. This comparison also applies to hedge funds.

Although hedge funds fall under the umbrella of collective investment schemes (CIS), their operational mechanics are notably different from traditional long-only funds—these distinctions are vital. Understanding how hedge funds operate and why they were historically difficult for individuals to access sheds light on their growing significance as investment tools today.

Similar to the grizzly bear, known for its agility, versatility, and toughness, hedge funds possess unique traits that justify their distinction.

Let’s explore how this difference relates to you as an investor.

Hedge funds: Distinctively structured

In 2015, hedge funds gained formal recognition as CISs under the Collective Investment Schemes Control Act (Cisca). This regulatory update improved transparency and accessibility.

However, just like the grizzly bear cannot be defined merely by its classification as a brown bear, hedge funds exceed the standard CIS definition. Their conduct and foundational framework create significant differences.

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

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

While long-only unit trusts typically adopt a buy-and-hold approach—investing in stocks, bonds, and real estate—hedge funds leverage a comprehensive toolkit focused on capital protection and return generation in both rising and falling markets.

These strategies include:

• Short selling: Gaining from declines in asset prices.
• Options and derivatives: Tools for managing risk and enhancing returns.
• Event-driven and special situations: Tactics that exploit temporary market inefficiencies.
• Pair trading: Benefiting from performance differences between comparable companies.

Why this is crucial

Hedge funds are not bound by market trends. They adapt to various market conditions, much like how a grizzly alters its behaviors to suit shifting environments—providing investors with greater flexibility and consistency.

Focusing on absolute returns rather than simple index outperformance

Most traditional funds strive to outperform an index—even if that index is on the decline.

In contrast, hedge funds focus on absolute returns, aiming to grow your wealth regardless of the broader market’s performance.

Significance of this approach

Your financial goals should be evaluated in real terms—actual currency—rather than just relative metrics. Like a grizzly preparing for winter, hedge funds concentrate on meaningful outcomes: protecting and enhancing capital under all circumstances.

Minimal correlation with traditional assets—true diversification

Grizzlies do not mimic the patterns of their coastal cousins, and hedge funds do not consistently mirror the actions of stocks or bonds.

Importance of this aspect

In turbulent markets, hedge funds can act as buffer agents. Their low correlation with traditional asset classes helps achieve more stable returns and enhances your portfolio’s resilience during downturns.

Once challenging to access—now available to individual investors

Encountering a grizzly in the wild once required an expensive expedition to North America. Similarly, accessing hedge funds used to require institutional connections or complex investment strategies.

Today, that landscape has transformed.

Why this matters

Hedge funds, such as those at Peregrine Capital, are now available through all major linked investment service provider (Lisp) platforms. They have become crucial for skilled financial advisors who recognize the value hedge funds can offer their clients. Enhanced accessibility and significantly lower minimum investments mean private investors can now utilize strategies once exclusive to institutions and professional asset managers.

Compact industry size—focus and agility

Grizzlies thrive in specific habitats where agility and concentration are vital. Similarly, hedge funds in South Africa represent a relatively small industry (approximately R80 billion compared to over R2 trillion in long-only CIS), which can be advantageous.

Why this is relevant:

Smaller fund managers often demonstrate greater nimbleness. They can quickly seize overlooked opportunities and avoid the risks tied to larger institutions’ operations, providing investors with specialized expertise.

What this means for you

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

• More stable returns
• Better protection against downturns
• Effective diversification
• Access to top-tier strategies
• Alignment with tangible financial goals

In a market defined by increasing volatility and complexity, hedge funds represent a more adaptable and resilient investment strategy. They are no longer just for the exceptionally wealthy—and they are increasingly playing a crucial role in modern portfolios.

PS: No bears were harmed in the writing 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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