1. Medical Schemes: Investing in a new asset class
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 July’07 Sun City

2. The BHF Southern African Conference 22-25 July’07 Sun City
Contents
Squaring
the Circle
Introduction to the Hedge Fund Industry
How relevant are Hedge Funds for Medical Schemes?
The BHF Southern African Conference July’07 Sun City

3. What are Hedge Funds? Squaring the Circle Fundamentally different
Traditional Investments (e.g. equities, bonds)
Hedge Funds
Investment Objective
Outperform a market benchmark
Absolute Real Return
Primary Source of Returns
Market Based
Manager Skill
Investment Constraints
Long Only
Flexible
Manager Compensation
Based on AUM
Based on AUM & Performance
Fundamentally different
The BHF Southern African Conference July’07 Sun City

4. Growth of Emerging Markets Hedge Fund Industry
Squaring
the Circle
Source: Hedgefund.net
The BHF Southern African Conference July’07 Sun City

5. Growth of South African Hedge Fund Industry
the Circle
The BHF Southern African Conference July’07 Sun City

6. The BHF Southern African Conference 22-25 July’07 Sun City
Contents
Squaring
the Circle
Introduction to the Hedge Fund Industry
How relevant are Hedge Funds for Medical Schemes?
The BHF Southern African Conference July’07 Sun City

7. Conundrum for Medical Schemes
Squaring
the Circle
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 July’07 Sun City

8. Can Hedge Funds assist in addressing this challenge?
Squaring
the Circle 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 July’07 Sun City

9. Generic Profile of ideal Hedge Fund solution
Squaring
the Circle
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 July’07 Sun City

10. South African Regulation
Squaring
the Circle
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 July’07 Sun City

11. The BHF Southern African Conference 22-25 July’07 Sun City
Conclusion
Squaring
the Circle
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 July’07 Sun City