CAPE TOWN – Individual South African investors can look forward to being able to invest in hedge funds from early next year. Industry insiders expect that the first retail products will be available by the first quarter of 2016.
This follows the passing of the September 30 deadline for funds to register as collective investment schemes with the Financial Services Board (FSB).
The new regulations require all South African hedge funds to appoint a management company (manco), which is responsible for the registration of the individual funds. Once they are registered, funds will have a year to comply with regulations and launch their offerings.
However, executive at RisCura, Albrecht Gantz, says that funds will not want to take the full 12 months available to them, as the sooner they can get to market the better.
“I think it’s in any fund’s best interests to comply as soon as possible,” he says. “Especially if you are a single manager and your fund-of-funds manager requires that you fall in place, or if you have a big third party investor that needs you to have everything in order.”
Although there have been complications in the registration process and many hedge fund managers left their applications until the last few days, Gantz believes that this was to be expected given that it was a huge learning experience for everybody involved.
“It’s difficult in a new environment for everyone to be on the same page from the start,” he says. “But hedge fund managers and the FSB have been quite positive and respect the process.”
The FSB confirmed to Moneyweb that it had received applications for registration from 21 different mancos and is currently processing those applications. It did not however specify how many individual funds those mancos represented.
The latest Novare SA Hedge Fund Survey shows that at the end of June this year there were over 111 hedge funds in South Africa with total assets under management of R62 billion.
Retail hedge funds
Under the new regulations, hedge funds will fall into two tiers: qualified investor hedge funds, and retail investor hedge funds. The former will only be available to individuals who have a minimum of R1 million to invest and have appointed a financial services provider with requisite knowledge on hedge funds to assist them. Retail investor hedge funds will be available to anybody.
Funds registered in the retail tier will have restricted mandates in that they will not be able to invest in a portfolio of qualified investor hedge funds, immovable property or private equity. They will also have to provide monthly liquidity and meet certain risk standards.
“Local retail hedge funds will be what they overseas call ‘hedge fund lite’,” explains Ian Hamilton, chief executive of hedge fund administrator IDS.
Given the complexities inherent in hedge funds, it is likely that funds-of-hedge-funds will be a popular entry point for retail investors. These vehicles will allow investors to access different strategies blended together to try to achieve the best risk-return balance.
The most common hedge fund strategy in South Africa is equity long/short, and this will also be the most prominent in retail hedge funds. The intention, in simple terms, is not to try to out-perform the market in all cycles, but to provide downside protection that will smooth portfolio returns.
“They are not special high performance funds,” Hamilton explains. “They are there for capital preservation and removing as much market correlation as possible. So when you have bull markets they do tend to underperform, but in bear markets they offer you capital protection.”
He says that it will be important for investors to appreciate this about hedge funds and be aware of what they are buying into.
“There are huge concerns about the mis-selling of hedge funds to the retail market,” Hamilton adds. “I’ve seen this on a global basis when hedge funds have gone into the retail market and there has been market upheaval. Investors tend to flee when they should be getting in because they haven’t educated themselves about these strategies.”