Page 136 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 7 Understanding asset allocation

a put option is the equivalent of a short position. In either
Hedging case, the option writer assumes the obligation of either
Hedging is a strategy for reducing selling or buying the asset from the option holder if the
risk by taking an opposite position option is exercised.
in another market. An importer of From a hedging point of view, options can be used in
goods, for example, is exposed to fluctuations in much the same way as futures. Which type of instrument
the rand, and may suffer losses if the rand weakens. a fund manager uses will depend on a variety of technical
To protect against this possibility, he can enter into factors, including the cost of options and the type of
a forward contract to buy rands, locking in what he exposure sought.
regards as a favourable exchange rate. The importer Warrants
is therefore short rands in the physical market (ie,
he doesn’t yet have the rands he will need to pay for A warrant is a particular type of traded option, usually
his imports), and long rands in the forward market created with ordinary shares as the underlying assets.
(ie, has a contract to buy rands at a fixed price). On the JSE, warrants are listed in the same way as
ordinary shares and have the advantage that they can be
traded through a stockbroker in the same way as other
JSE securities.
The price quoted for a warrant in the paper is the
Hedge fund “premium” payable for the rights attached to the warrant
A hedge fund is a collective investment (ie, the right to buy or sell an underlying share on or
scheme which tries to generate very before a certain date). Like any other option, the warrant
high returns from trading rapid, short has a strike price, for example, R100 per share.
term market movements. To make warrants on expensive shares more
The term hedge fund is often a misnomer, because affordable, the issuers frequently use a conversion ratio,
many hedge funds don t do much hedging! The term which means that (for example) 10 warrants need to be
arises because these funds tend to use derivative exercised in relation to one share of the underlying equity.
instruments – the same instruments used by hedgers
– to take aggressive, leveraged positions. Some hedge Use of derivatives by unit trust funds
funds (those more deserving of the name!) specialise Traditional unit trusts (ie, those that are not hedge
in arbitrage and program trading, and minimise risk funds) are permitted to use derivatives to a limited
through a sophisticated use of derivatives which extent. In other words, derivative instruments such as
allows fund managers to exploit price anomalies futures and options are not the exclusive preserve of
without being exposed to market movements. hedge funds – they may be used by “ordinary” unit trusts
but to a lesser degree.
Paradoxically, non-hedge funds are essentially restricted to actual hedging. In other words, the
derivative exposure of an “ordinary” unit trust is limited to its long positions. For example, a fund
holding R100m in equities plus cash of R100m could sell futures to generate a short position worth
up to R100m (which would make the portfolio fully hedged), or could buy futures to generate further
long exposure of up to R100m. A qualified investor (QI) hedge fund, on the other hand, could use
futures to create exposure far in excess of assets under management. Remember that futures
(and other derivatives) are geared instruments – a margin payment of (typically) 10% to 15% of
the market exposure is needed to enter into the contract. Hence cash of R10m could buy equities
worth R10m (ie, rand for rand exposure), or, in the futures market, equity exposure of nearly R100m
(10 times gearing). In practice, QI funds are restricted by regulations to exposure of 300% and retail
hedge funds to 200%.
Alternative investments
The category of alternative investments, or exotics, includes everything that doesn’t fit into the
four traditional asset classes (cash, bonds, property and equities). Because the category is so broad
it is difficult to give a clear definition; exotics can include everything from collectibles like fine art,
wine and vintage cars to intangibles like derivatives and cryptocurrencies.
There are many sub-categories that are seen as “exotic” in more traditional investment settings
but not in others. Precious metals and physical commodities, for example, would be exotics for
most retail investors but are stock in trade for many specialist investors and derivatives traders.

134 Profile’s Unit Trusts & Collective Investments September 2025