Dear reader,
In today’s complex and often volatile investment landscape, making informed decisions is crucial, especially when it comes to managing retirement funds. With financial security as the primary goal, retirees must carefully balance risk and reward, particularly when considering higher-risk investment options such as hedge funds.
Diversification – spreading investments across a variety of asset classes – remains a cornerstone of prudent financial strategy, offering protection against market volatility and enhancing the potential for long-term growth.
However, not all investment vehicles offer the same level of risk-adjusted returns. In particular, hedge funds, often marketed as high-return solutions, can present significant challenges.
Watch: Hedge funds – a brief overview
In this article, we explore the benefits of a diversified investment approach, the complexities of hedge fund investments in the South African market, and considerations for retirees looking to make strategic, informed choices about where to allocate their capital.
High risk, high reward
Peregrine Capital is a well-known and reputable asset management firm in South Africa, with a history of managing both institutional and individual investors’ portfolios. Its high-yield fund is typically structured to target higher returns, often through investments in riskier assets, such as credit instruments, high-yield bonds, or equities that may offer above-average income potential.
However, higher returns generally come with higher risks and much higher fee structures and performance fees.
At PSG Wealth, we typically prefer advising on portfolios that do not include performance fees – fees that the typical investor is not aware of, especially in an environment that can be volatile, as is often the case with high-yield investment strategies.
While Peregrine’s fund might have a strong track record, you’ll want to ensure that you fully understand the underlying assets and the level of risk involved.
Given that you are in retirement, your financial priorities are likely focused on preserving capital, generating steady income, and minimising the risk of significant loss.
Watch/read:
What is risk?
Risk management: A guide for investors
Your portfolio, as described, is already relatively diversified, with living annuities, rental income, and fixed interest investments, which provide a mix of predictable income and capital preservation.
The R3 million investment you are considering would represent a significant portion of your liquid assets (approximately 18% of your total investments).
If you’re relying on your investments to maintain your lifestyle, particularly in retirement, you might want to consider whether the higher risk associated with a high-yield fund aligns with your risk tolerance and financial goals.
The challenge with high-yield funds is that, while they may offer strong returns in a favourable market, they can also suffer during periods of economic stress or market downturns.
Diversification and risk management
As you’ve rightly noted, diversification is key to managing risk, especially in retirement. Putting R3 million (18%) of your total portfolio into one high-yield fund could expose you to concentration risk, meaning that a poor performance in that particular asset class or fund could significantly impact your overall wealth.
Read: How do you manage risk in a concentrated portfolio
Even though Peregrine Capital is a reputable company, no investment is entirely risk-free.
To mitigate this, you might consider the following strategies:
- Diversification within the high-yield space: Rather than investing all of the R3 million into a single fund, consider spreading the allocation across a range of high-yield funds, or including other asset classes (such as fixed income, bonds and equities) to balance the exposure.
- Limiting the investment amount: If you’re unsure about the risks involved, it may be prudent to invest a smaller portion (say 5-10%) of the R3 million, allowing you to gauge the performance while still maintaining diversification and reducing overall risk.
Other considerations:
- Liquidity needs: How accessible will your R3 million be if you need it for emergencies or unexpected expenses? High-yield funds might have less liquidity or longer redemption periods, which could be a concern in the case of unforeseen needs.
- Inflation protection: With rising inflation, fixed-income investments may not always keep up with the cost of living, but high-yield funds can potentially offer higher returns that outpace inflation. However, this comes with the trade-off of increased risk.
Diversification remains a critical element of any well-structured portfolio, particularly as you may want to ensure a balance between income generation and capital preservation. Focus on a multi-asset and multi-manager approach – and clean fee structures.
Read: Diversify or di-worse-ify? The fine line between smart strategy and risky overload
You might want to:
- Limit your exposure to the high-yield fund by starting with a smaller allocation and monitoring its performance.
- Diversify the R3 million into other assets or funds that provide lower risk but stable returns.
- Consult with a financial advisor to review the specifics of Peregrine Capital’s high-yield fund, including fees, risk level, and past performance relative to similar investment options.
Listen/read:
Are hedge funds right for your portfolio?
‘Hedge funds can be a risk-reducer or diversifier, or a return-enhancer’