Newly regulated hedge fund industry delivers strong growth in 2015

10 February 2016 Robert Foster, ASISA
Robert Foster, convenor of the ASISA Hedge Funds Standing Committee.

Robert Foster, convenor of the ASISA Hedge Funds Standing Committee.

The newly regulated South African hedge fund industry grew its assets under management by R5.1 billion in the 12 months to 31 December 2015, ending the year with assets of R62.1 billion.

The 2015 statistics for the local hedge fund industry, released by the Association for Savings and Investment South Africa (ASISA) today, show that the industry has enjoyed a steady growth in assets in recent years after retirement funds were allowed to invest a portion of their assets in hedge funds in 2011.

Robert Foster, convenor of the ASISA Hedge Funds Standing Committee, says the industry is expected to experience another growth spurt now that investors have access to regulated products for the first time.

In April last year South Africa became the first country to put in place comprehensive regulation for hedge fund products. Since hedge funds now fall under the Collective Investment Schemes Control Act (CISCA), they are deemed regulated collective investment schemes, just like unit trust portfolios.

The first two hedge fund management companies and their funds, representing about 70% of the industry’s assets under management, were approved by the Financial Services Board (FSB) in December 2015.

The new regulations provide for two categories of hedge funds, namely Qualified Investor Hedge Funds and Retail Investor Hedge Funds. Retail Investor Hedge Funds are designed for more risk averse investors, operating in a similar manner to unit trust funds.

Foster says while the regulation of hedge fund products is new, hedge fund managers in South Africa have been regulated for a number of years and must comply with the Category IIA license requirements of the FAIS Act before they can manage investors’ funds.

According to Foster, the 10 largest hedge fund managers in South Africa manage 71% of the hedge fund industry’s total assets under management.

“This means that the bulk of hedge fund assets are invested in sizeable portfolios managed by well-established hedge fund asset managers with a consistent track record of success,” explains Foster.

Hedge funds apply a number of different strategies to mitigate the impact of market volatility. The most common hedge fund strategy in South Africa is referred to as “equity long/short”. At the end of December 2015, some 61% of hedge fund assets were invested in this type of strategy.

The HedgeNews Africa Long/Short Equity Index delivered a performance of 17.1% for the one year to the end of December 2015, 15.1% over five years and 14.5% over seven years. By comparison, the JSE All Share Index (ALSI) achieved a 5.1% return for the 12 months ended December 2015, 13% for the five years and 16.4% over seven years. The SA Multi Asset Medium Equity category recorded average returns of 7.4% for the one year to the end of December 2015, 10.6% for the five years and 11.3% for seven years.

Foster says these average performance figures illustrate the role of hedge funds in a well diversified investment portfolio. “Hedge funds are designed to outperform the markets during times of extreme volatility as experienced last year. However, when financial markets deliver strong performances hedge funds are unlikely to shoot the lights out.”

He adds that hedge funds aim to reduce market volatility for investors by applying specialist strategies and should be considered as one of the building blocks of a well-diversified investment portfolio.

“A common misperception is that hedge funds are an asset class. Hedge funds are not an asset class. Instead they manage asset classes such as equities, bonds, cash and property by applying specialist strategies such as equity long/short, fixed interest arbitrage and multi-strategy.”

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