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From scepticism to 2x growth

13 March 2023 Gareth Stokes

The South African hedge fund industry enjoyed a stellar 2022, shrugging off last year’s financial market turbulence to grow assets under management (AUM) by 30%, from ZAR86.9 billion to ZAR113.0 billion. It is worth noting that the combined AUM invested in retail and qualified hedge funds has more than doubled over the last few years after industry stakeholders initially struggled to get to grips with hedge fund regulations, introduced April 2015. More recently, flows into hedge funds have benefited from changes to regulation 28 which see the asset class having its own investment cap.

Rebounding from seven lean years

“Seeing strong growth numbers for the industry is a welcome development and hopefully indicates that hedge funds in South Africa are increasingly being accepted as an important investment tool in mitigating market volatility,” said Hayden Reinders, convenor of the Association for Savings and Investment South Africa (ASISA) Hedge Funds Standing Committee. He added that the industry had endured several lean years following the implementation of the April 2015 reform initiatives, in part due to the widespread consolidation and closure of funds. The number of hedge funds available to investors in South Africa has since stabilised at 216 funds. 

Readers might benefit from some hedge fund definitions before we plough deeper into the ASISA update for quarter four 2022. To begin with, we remind you of the terminology introduced in the regulation to separate retail from qualified investor hedge fund investors. A qualified investor hedge fund is “open to investors with a solid understanding of the investment strategies deployed by hedge funds and the associated risks” and requires a minimum investment of ZAR1 million. Retail hedge funds, meanwhile, are strictly regulated in terms of the investments and the risks that they are allowed to take and are open to all investors who can afford the average minimum lump sum investment amount of ZAR50 000,00. Our guess is that the bulk of your clients will dabble in the retail hedge fund category. 

Retail investors creeping up to 40%

The split between retail and qualified investor hedge funds has remained consistent over the last three years, at 37% versus 63%, suggesting that the asset class remains in favour among both high net worth and institutional investors. Reinders noted that the long-short equity and fixed income categories remained popular among retail investors, with the former accounting for 59.2% of retail AUM and the latter, 27.3%. The third category, multi-strategy attracted 13.5% of assets. Over 2019 and 2020 there was a net decrease of AUM in the retail hedge fund space, with a slight uptick in 2021. But in 2022, the proverbial sluice gates opened, with around ZAR4 billion flowing into the aforementioned categories. ASISA shared definitions of these categories as follows: 

  • Long-short equity hedge funds are portfolios that predominantly generate their returns from positions in the equity market regardless of the specific strategy employed, such as ‘long bias’ and ‘market neutral.
  • Fixed income hedge funds are portfolios that invest in instruments and derivatives sensitive to movements in the interest rate market.
  • Multi-strategy hedge funds are portfolios that, over time, do not rely on a single asset class to generate investment opportunities but rather blend a variety of different strategies and asset classes with no single asset class dominating over time. 

Further regulation expected this year

The comprehensive regulation of the hedge funds industry has seen both asset managers and associations take a more consistent approach to the asset class, treating hedge funds and Collective Investment Schemes (CIS) in similar fashion. “Every time ASISA has commented on CIS standards, we have amalgamated and aligned those standards to hedge funds,” said Reinders, before mentioning the introduction of classification and performance standards and total expense ratios (TERs) as examples of this approach. ASISA has also ramped up its education and marketing efforts in recent months and will continue to showcase the function and performance of hedge funds in the broader investment industry. 

The regulatory environment continues to evolve. Over the coming 12-months, industry stakeholders expect to see draft conduct standards that will introduce changes to both the Collective Investment Schemes Act (CISCA) and the hedge funds regulations issued under Board Notice 52 and Board Notice 90. “We continue to assess upcoming draft standards for potential regulatory impact and changes [and believe] that we have not yet seen the effects of the regulation 28 changes that were introduced last year,” said Reinders. He added that the market had perhaps missed this development due to the hype being directed at unrelated regulation 28 changes such as increases in the total allowances to offshore and infrastructure. 

What does the future hold?

According to Reinders, investors seem to be appreciating the value of hedge funds. “It took the industry a few years to get to this point and we believe the trend will continue, especially with the regulation 28 changes being clearer on the 10% overall limit to hedge funds,” he said. It has also become easier for financial advisers to explain the hedge fund construct to their clients. Over the coming years, ASISA expects more Linked Investment Service Providers (Lisps) to offer retail hedge funds on their platforms, making them more accessible to investors. They also expect the trend towards daily pricing of hedge funds to continue. 

“We are seeing more demand for daily pricing to allow hedge funds to meet the cut-off and timeline requirements set by LISP platforms,” Reinders concluded. In addition, some of the bigger hedge fund managers are investing in distribution and business development teams to grow their market share. Perhaps the 30% surge in AUM in this previously under loved asset class will repeat in 2023 and beyond. 

Writer’s thoughts:

In the past, hedge funds were the exclusive domain of professional investors and institutions such as asset managers, insurers and retirement funds. Nowadays, your clients can climb on board for as little as ZAR50 000,00. Are you seeing increased appetite from your clients for hedge fund exposure, or is this something they seldom ask about? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

 

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