36One: 'Management should not be offended when we short their shares'




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 CY Jacobs CIO of 36One Asset Management has never adopted the approach of an activist hedge fund manager. He will never discuss his short positions, even though in the three times his positions got into the public domain, he was right on the money.

He was an early critic of African Bank Investments, and he was also a known sceptic of Steinhoff International. 36One had a short position in the retail conglomerate for much of the nine years before its demise.

More recently, Citywire A-rated Jacobs (pictured) was a critic of Resilient which, while never as dysfunctional as the first two, was engaged in some sharp accounting practices.

Jacobs won’t talk about the current shorts. He is even quite reluctant to discuss the long positions in his three hedge funds. But he did say that there are nuances that are sometimes misunderstood.

Management should not be offended if we short their shares,’ he said. ‘We might take a pair trade in which we go long Absa and short Standard Bank, for example. We are then taking a view on the relative value of the shares, not betting against Standard Bank’s overall strategy.’

Jacobs said the larger long hedge fund positions often look different from the larger holdings in its long-only funds such as the 36One BCI Equity fund.

‘The aim in our hedge funds is to beat cash. Our clients should not be comparing us to an equity index.’

Hedge fund performance
Currently, 40% of 36One’s assets are held in its three hedge funds. The 36One SNN QI Hedge fund was started in 2006 and has R5.5bn of AUM. The firm’s two retail hedge funds – the 36One SNN Retail Hedge fund and the 36One SNN Absolute Alpha Retail Hedge fund –have AUM of R1.1bn and R1.4bn, respectively.

A further 6bn is in segregated hedge fund mandates.

Jacobs said that the retail funds, which were introduced when regulation allowed in November 2016, have daily liquidity. Investors can access their money as quickly as they could from any of 360ne’s long-only funds. The QI Hedge fund still has monthly liquidity, but Jacobs said that the large institutions, which invest at least R50m into the fund, are still comfortable with this.

‘We have a new market with our retail funds, and the R2.5bn was from smaller investors, such as affluent investors and DFMs who value the daily liquidity. The minimum investment is also much lower, with a recommended minimum of R250,000.’

The fees are the same for the retail product as they are for the qualified fund. Over time, market forces have brought the base fee down from 2% to 1%. But 36One continues to charge a 20% fee on all returns ahead of cash, though over any rolling one-year period the maximum fee is 3.5%.

36One has certainly added value to the hedge funds. Since it was incorporated as a CIS, the 360ne Retail Hedge fund, up until 31 August 2022, has given a 12.2% return, net of fees. That compares with 5.2% for cash and 8.6% for the Alsi.

The 36One SNN Absolute Alpha Retail hedge fund is also now closed to new business.

‘With R1.5bn under management, we don’t think that we would implement our strategy as effectively if we took on more. This would compromise the interests of our existing clients.’

This is a market-neutral fund, though only at times will it be strictly neutral, with its long positions perfectly matched out by its shorts. More typically, the fund has a net market exposure of about 35%.

But it is certainly a low heartbeat fund with losses in only five of the 50 months since inception in July 2018. It has proven to be a good investment choice in the volatile markets of the past four years. It has returned 17.6% a year, which is well ahead of both cash (4.7%) and the Alsi (7.6%).