SA hedge funds grow assets under management to R57 billion

10 February 2015 Robert Foster, ASISA

The South African hedge fund industry grew its assets under management by a healthy R10.5 billion in the 12 months to 31 December 2014, ending the year with assets under management of R57 billion.

These assets are invested in 113 hedge funds, which are managed by 55 hedge fund managers (fund of hedge fund managers excluded).

The 2014 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 consistent steady growth of around R10 billion a year over the past three years. At the end of 2012 assets under management amounted to R36 billion and at the end of 2013 assets stood at R46.5 billion.

Robert Foster, convenor of the ASISA Hedge Funds Standing Committee, says the 10 largest hedge fund asset managers are managing 69% 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 consistent track records 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 2014, some 64% of hedge fund assets were invested in this type of strategy.

The HedgeNews Africa Long/Short Equity Index delivered a performance of 14% for the one year to the end of December 2014, 13.7% over five years and 10.3% over the seven year period ended December 2014. By comparison, the JSE All Share Index (ALSI) achieved a 10.9% return for the 12 months ended December 2014, 15.8% for the five years and 11.3% over the seven year period ended December 2014.

Foster says a common misperception is that hedge funds are a type of 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 hedge and multi-strategy.”

Foster says 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.

According to Foster, South Africa will become the first country in the world to offer comprehensive regulated hedge fund products as soon as the Minister of Finance approves draft regulation under the Collective Investment Schemes Control Act (CISCA).

“Once hedge funds fall under CISCA, they will be deemed regulated collective investment schemes, just like unit trust portfolios.”

He explains that in terms of the draft regulation, there will be two categories of hedge funds, namely Qualified Investor Hedge Funds and Retail Investor Hedge Funds. Retail Investor Hedge Funds will be designed for individual investors, operating in a similar manner to unit trust funds.

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, which include Fit and Proper Regulations, before they can manage investors’ funds.

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