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Latest Novare Hedge Fund Survey elicits record participation to provide the most comprehensive picture of the South African hedge fund industry to date

18 November 2020 Novare
Jacobus Brink, Head of Investments at Novare

Jacobus Brink, Head of Investments at Novare

Benedict Mongalo, Chief Investment Officer at Independent Fund Manager, Novare Investments

Benedict Mongalo, Chief Investment Officer at Independent Fund Manager, Novare Investments

The 2019 Novare Hedge Fund Survey elicited a record response from more than 70 South African hedge fund managers who collectively manage 130 uniquely mandated hedge funds and represent 75.8% of the total hedge fund industry assets under management (AUM).

Coupled with fund fact sheets that are publicly available, this enabled the collation of market-leading insights into a single, concise report that provides the most comprehensive overview of the South African hedge fund industry to date, whilst revealing a number of interesting industry developments.

Says Jacobus Brink, Head of Investments at Novare: “Participation in the survey is voluntary and focuses solely on single-manager, South African-domiciled, Rand-denominated hedge funds that invest predominantly in South African financial markets. We are deeply thankful for every hedge fund manager who responded, as this contributes to the quest for transparency and helps ensure that the domestic hedge fund industry is better understood by stakeholders and interested parties alike.”

Key insights

Some of the key insights highlighted in the survey are as follows:

  • Growth in industry assets
    Against a backdrop of volatility in both the global and domestic capital markets, the survey indicates an interesting development; that after two successive years of steady decline, the industry AUM has increased to R52.8 billion during the 12-month period under review, which constitutes growth of 12%.
  •  Large asset managers led the way
    Large asset managers with hedge fund investment capability and AUM of over R100 billion saw a relatively high growth in hedge fund assets, followed by those with assets between R500 million and R1 billion
  •  Equity long/short funds outperformed other strategies
    Equity long/short (LS) funds outperformed other strategies and managed to protect capital during market drawdowns. This strategy nevertheless experienced a greater loss in assets, reducing its industry weight by 14%.
  •  Fixed income strategies maintained absolute returns
    Fixed income strategies maintained absolute returns throughout the period, continuing on its steady path of consistent performance since 2016 and yielding an increase in returns of 4%; from 15% in 2018 to 19% in 2019. 
  •  Positive performance all round
    In general, the industry performance was positive across all categories in terms of asset size and strategies. Large managers with AUM in excess of R2 billion, once again posted the highest returns, followed by hedge funds with AUM of between R500 million and R1 billion.
  •  Increased capacity
    More capacity is available as the majority of funds are still below their asset peaks seen in prior years. It can be assumed that this is because of the large outflows experienced by the industry from 2017 to 2018.
  •  Emergence of co-investments
    The emergence of co-investments adds another dimension to hedge fund investing and presents a new and exciting opportunity, especially at 7.2% which is slightly higher than retail allocators.
  •  High-net-worth individuals remain at the top
    High-net-worth individuals (HNWI) remain the most significant allocator in the industry.

Regulation and introduction of the Hedge Fund Classification Standard

Another significant development in the domestic hedge fund industry in 2019, was the publication of the Hedge Fund Classification Standard by the Association for Savings and Investment in South Africa (ASISA), which aims to provide a framework within which hedge fund portfolios with comparable investment objective and scenarios can be grouped, and to provide a clearer picture of the various strategies offered.

The survey solicited views from the industry on this development, as well as some of the other recent regulatory interventions, such as the hedge fund industry being included under the regulatory ambit of the Collective Investment Schemes Control Act. The major concern of the industry is the regulatory prohibition of a collective investment scheme (CIS) to invest in a collective investment scheme (CIS) hedge fund

In conclusion

Interestingly, the hedge fund industry is still poorly understood as many South African investors perceive hedge funds as riskier than unit trusts when, in fact, the two vehicles have been very similar, since the introduction of hedge fund regulations.

Brink concludes: “To quote Ruan Jooste in the article published in Daily Maverick on 10 October 2019: “Hedge funds: it’s not an ‘or’ discussion, it’s an ‘and’ discussion.” As is increasingly being suggested in the hedge fund industry, allowing other CIS funds to invest in hedge CIS’s may be a solution to open such an “and” discussion.”

The complete 2019 Novare Hedge Fund Survey can be accessed at: https://novare.com/wp-content/uploads/Novare-Hedge-Fund-Survey-2019.pdf

Quick Polls

QUESTION

ASISA’s lobbying of the SARB to suspend Circular 15, which contained significant changes to foreign exchange controls. What is your take on this accusation?

ANSWER

[a] ASISA was right to seek clarity on Circular 15
[b] Large asset managers are conflicted & will suffer financially if Circular 15 stands
[c] Savers get enough exposure to offshore assets under existing Reg 28
[d] Who cares?
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