Why hedge funds can deliver when markets fall
By Kim Zietsman, Laurium Capital.
Investors often only discover the true value of diversification when markets come under pressure.
In rising markets, many risk assets appear to work well together.
During periods of stress – when equities, bonds and currencies are repriced at the same time – the difference between owning several investments and owning genuinely differentiated return streams becomes clear.
This distinction has been especially relevant in 2026. In the nine months to 30 September, the Laurium Market Neutral Prescient RI Hedge Fund returned 6.7% net of fees, while the FTSE/JSE Capped All Share Index declined by approximately -3.0%. The difference was particularly pronounced in March and September this year.
In September, the fund gained 0.6% as the market fell -5.8% and March the market fell by -10.6% whilst the fund only retreated by -0.9%. This divergence demonstrated the benefit of generating alpha from long and short positions rather than relying on a rising equity market.
For a strategy designed to generate returns with limited dependence on market direction, this is the fund walking the talk.
Source: Morningstar Direct
A difficult market for long-only investors
The market volatility has been uncomfortable for long-only investors because their portfolios remain structurally exposed to market direction.
Good stock selection may soften the impact of a falling market, but broad equity exposure can still dominate the outcome.
A different return equation
A market neutral hedge strategy is constructed differently.
It combines long positions in companies expected to outperform and short positions in companies expected to underperform.
Overall net market exposure is kept low, allowing returns to be driven mainly by the difference between the winners and losers selected by the manager.
The fund therefore does not need the JSE to rise to generate a positive return. Rather, it needs its long ideas to perform better than its short ideas.
This relative-performance focus is particularly useful when market direction is uncertain and the gap between stronger and weaker companies is wide.
Idiosyncratic alpha
A key advantage of hedge funds is their ability to generate idiosyncratic returns: returns driven by company-specific research, relative-value opportunities and portfolio construction rather than the direction of the overall market.
This provides access to sources of alpha that differ from the equity-market beta embedded in conventional long-only funds.
Alpha can come from both sides of a market neutral portfolio.
A long position may add value when a company grows earnings faster than expected, improves margins or benefits from a strategic catalyst.
A short position may contribute when a company disappoints, faces structural pressure or is priced too optimistically.
Returns depend on identifying these differences correctly – not on the overall equity market rising.
What negative downside capture means
These differentiated return drivers help explain why the Laurium Market Neutral Fund has historically shown negative downside capture relative to the FTSE/JSE Capped All Share Index.
Downside capture measures how a fund performs on average during months when the equity market declines.
A figure below 100% indicates that it has lost less than the market.
A negative figure goes further: it means that, on average, the fund has generated a positive return during those down months.
This does not mean the fund will rise every time the market falls, or that investment risk disappears.
It shows that the strategy’s return pattern has historically differed when equity markets are under pressure – precisely when diversification is most valuable.
Protection without abandoning opportunity
Market neutrality is not about eliminating all risk or guaranteeing a positive outcome in every period.
It is about reducing the extent to which portfolio returns depend on a rising market.
Disciplined hedging, liquidity management and position sizing are central to this objective.
The Laurium Market Neutral Fund focuses on liquid, listed South African equities and applies fundamental research to identify relative value.
In a concentrated market, this allows the team to look beyond the headline index and focus on company-specific opportunities on both sides of the portfolio.
A role in a diversified portfolio
For South African investors, market neutral funds can complement traditional equity, multi-asset and fixed-income portfolios.
Their role is to add idiosyncratic alpha with a return pattern that is less dependent on equity-market direction.
The fund’s negative downside capture is evidence of that differentiated behaviour.
The current environment is a reminder that diversification should be judged by behaviour, not labels.
When traditional assets respond to the same inflation, interest-rate or geopolitical shock, investors need strategies with genuinely different sources of return.
The Laurium Market Neutral Fund’s positive performance in a falling market is a practical example.
It has relied on fundamental research, relative-value stock selection and disciplined hedging – the tools it was designed to use to generate real returns through all parts of the market cycle, including the ups and the downs.
Learn more about Laurium Capital.
Laurium Capital is an authorised financial services provider (FSP 34142).
This article is published for information purposes and does not constitute financial advice. Past performance is not necessarily a guide to future performance. Investors should consider their individual circumstances and seek appropriate professional advice.
Loading ...