Tower Hedge Fund's Currency-Based Bets Return 36% This Year

  • South African manager plots strategies to win on rand weakness
  • Expects approval for three more funds by early December

Tower Capital Management Pty Ltd., a South African hedge fund manager, said it’s investing in mid-sized companies with the potential to gain from the rand’s weakness against the dollar.

The firm’s Tower Aggressive Hedge Fund has posted year-to-date returns of 36 percent as of Oct. 21, compared with 27 percent a month earlier, portfolio manager James Faircliff said Wednesday in an interview. The manager is chasing a return of more than 50 percent per year, he said. The Tower Hedge Fund’s return has accelerated to 11 percent from 5 percent. Johannesburg’s benchmark FTSE/JSE Africa All-Share Index has gained 6.5 percent.

That performance could have been better. “The third quarter was a bit of a shocker,” Faircliff said in Johannesburg, referring to the impact of China’s yuan depreciation in August, which roiled global markets.

Tower, with about 2.5 billion rand ($185 million) under management, is among fund managers in South Africa attempting to select equities and other investments to counter the impact of a mining sell-off that has increased unemployment and cut economic growth estimates. Faircliff said the firm expects commodity prices to remain weak until 2017.

“It’s difficult to paint a bullish picture,” Faircliff said. “We’re going to put more emphasis on shorting ideas,” referring to bets on declines in stock values.

One example is Tower’s short-selling of MTN Group Ltd., Africa’s largest wireless carrier, to take advantage of rand weakness, Faircliff said. While Johannesburg-based MTN has dollar debt, it reports in South African currency. MTN also faces challenges in Nigeria where the economic effects of the oil-price rout and the prospect of higher consumer taxes may crimp earnings, Faircliff said.  MTN has dropped 18 percent this year in Johannesburg-trading.

Another bid to gain from the rand’s drop is Tower’s bet on Super Group Ltd., a logistics company whose sales jumped almost 40 percent to 19.8 billion rand in the year through June after expanding in the U.K and Australia, Faircliff said. Super Group earns in foreign currencies while reporting in rand, which has fallen 14 percent this year against the dollar.

Retail Funds

The country’s fledgling hedge fund industry is counting on regulations implemented last month that encourage retail products with increased transparency to promote growth. The firm expects the regulator to approve three new Tower funds by early December, Faircliff said. About 40 percent of the company’s assets under management are in dollars, he said.

Tower favors liquid, or easily tradeable, stocks at the smaller end of the 100 largest on the JSE, Faircliff said. Investors seeking havens as the economy falters have turned to larger companies, which has caused some smaller stocks to suffer, he said.

“There will be earnings growth hopefully in the mid-caps,” Faircliff said. “It’s a stock-picker’s market and we have larger stocks and shorter positions for protection.”

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