Hedge funds grow assets, protect capital

South African hedge funds increased assets under management by over 8% to R32.1 billion as at 30 June 2010, against the previous year’s R29.7 billion, as the industry benefitted from a buoyant equity market in the second half of 2009.

More importantly, when equity markets sold off in the first half of 2010, hedge funds managed to protect capital, helping portfolios with hedge fund allocations to weather the storm.

These were amongst the findings of the 2010 South African Hedge Fund Survey released by Novare Investments in Cape Town today.

According to Carla de Waal, Portfolio Manager at Novare Investments, “Investors are demanding improved due diligence as regulators globally renew their focus on legislation aimed at curbing systemic risk. Amidst all of this, investors are still eagerly looking for alpha, and continue to find opportunities in the alternatives space at a time when returns from traditional asset classes have become more muted.”

Hedge funds participating in the survey recorded marginal net inflows, compared to net outflows a year before, with half of inflows going to 12 managers with at least two years of experience. While there were 12 new fund launches over the year, indicative of ongoing industry consolidation is that hedge funds with at least a five-year track record were managing half of all industry assets.

As in previous years, funds of hedge funds dominated industry investments with close to 80% of inflows into hedge funds coming from these funds. Direct investment by life insurers and high net worth individuals represented the remainder of net inflows.

Funds of hedge funds are still the largest investor group in the local industry, holding nearly 65% of all investments. With 9.7% of assets, high net worth individuals are the second largest group, followed by direct pension investments (9.2%) and life fund investments (8.6%). Only 1.6% of hedge fund assets under management are from offshore investors.

Other changes in the industry included lower average fees and a longer time frame before crystallisation of performance fees. In addition, the industry continued to improve transparency and reporting standards with more funds providing detailed portfolio holdings on a more regular basis, including intra-month performance updates.

On industry capacity, de Waal said: “Some 14.5% of hedge funds, representing 6% of industry assets, are closed for new investments. Capacity available in funds that do still accept new capital is just over R44 billion.”

As at 30 June 2010 equity long/short strategies made up the bulk of assets under management in the South African hedge fund industry, comprising 41.9% of assets.

Novare Investments’ 2010 South African Hedge Fund Survey can be found at http://www.novare.co.za/