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South African Hedge Fund Managers See Opportunity in African Consumer

By Benedicte Gravrand

GENEVA (TheStreet) -- James Faircliff and Richard Bottger, two young South African hedge fund managers, are passionate about the stock market and about investing: you'd have to be if you started trading stocks at the age of 13, which they did. As grown-ups, they began their professional career in private equity, and then moved into the listed space. Together they eventually formed Tower Capital in 2009.

Tower Capital is a Johannesburg-based firm. It runs a long/short equity hedge fund that is mainly focused on the South African stock market. After 52 months of trading, the annualized track record stands at 22% (net) with a standard deviation of 7%.

Faircliff and Bottger believe their strategy is a perfect fit for the continent.

"Africa is the last bastion of frontier investing," Bottger tells Matthias Knab during a recent Opalesque TV interview. "Everybody seems to want a piece of it. It's very topical, and certainly our strategy provides a very liquid access point into the African success story... We have the ability to be long liquid mid-market companies, and obviously for the downside protection given that we are an equity long/short fund. We are short the very high-beta big market capitalization stocks."

Performance Comparison

They studied closely low-beta versus high-beta performance against the industries over the long term, Faircliff adds, based on a U.S. paper which looked at global and U.S. markets: "We then brought the same methodology onto the South African stock market and regressed for 10 years, the lower-beta quartile versus the higher-beta quartile, and we found the same result. So we feel that strategically this gives us a long-term advantage by being long the lower beta stocks and typically short the higher-beta stocks."

The managers also brought their private equity background to the firm through their strong fundamental approach. Thus, they construct their portfolio with four parts; fundamental longs, fundamental shorts, opportunistic trading and short hedging.

"Most of the work we do is in the fundamental space," Faircliff continues. "This talks to the low-beta stocks that we invest in. These are names we like, we invest in them for the long run and we are quite active in trading those names. So exposure levels do range from maybe 12% to 13% down to 5% or 6% over a month or two depending on price action."

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