Most hedge funds will qualify as retail funds under new regulations
Yonela Makwetu, Investment Analyst at independent multi-manager, Novare Investments.
Most hedge funds in South Africa are well placed to be classified as retail investor hedge funds in terms of strict new regulations that require funds to be registered under the Collective Investments Schemes Control Act (CISCA).
This legislation also regulates unit trusts, and places the oversight and supervision of hedge funds under the jurisdiction of the Financial Services Board (FSB).
According to Yonela Makwetu, Investment Analyst at independent multi-manager, Novare Investments: “Some of the resultant requirements for hedge funds include additional reporting to investors and to the FSB, enhanced risk monitoring as well as independent trustee oversight.
“A manager must establish, document and maintain a risk management policy providing for the daily management of operational risk, business risk, liquidity risk and credit-counterparty risk.”
The new regulations distinguish between retail and qualified investor hedge funds. Retail investor hedge funds (RIHF) will be open to investments from the public and will be subject to stricter rules than qualified investor hedge funds (QIHF) aimed at more seasoned investors.
The recently released Novare South African Hedge Fund Survey 2015 found that assets under management by the industry reached R62 billion on 30 June 2015, a 15.8% increase on the previous year.
Said Makwetu: “As part of the 2015 survey, Novare Investments polled managers to ascertain how they were looking to position themselves in light of the regulations.
“The results were mixed with 36.0% of participating funds saying they would register their funds as retail funds, while 37.8% said they would likely to opt for qualified hedge funds. Just over 26% were uncertain.
“When we assess the requirements for retail funds, which is the stricter of the two categories, most industry participants are positioned in a way that fits the stringent requirements.”
Under the new regulations, retail hedge funds will offer a maximum notice period of a calendar month to facilitate redemptions, with qualified hedge funds requiring three calendar months. As at June 2015, 90.4% of funds required a redemption notice period of 30 days and 99.7% of funds had monthly dealing frequency.
Retail hedge funds will also have to report more frequently to the FSB compared to qualified funds.
On this point, Makwetu noted that hedge fund transparency has improved over the years with 57.1% of funds disclosing actual holdings to investors on a daily basis and 18.5% on a monthly basis. This means that 75.6% of hedge funds fall meet the regulatory reporting requirements for retail hedge funds.
Gross exposure represents the sum of the absolute value of a fund’s long and short positions. Investment guidelines relating to retail hedge funds state that funds should not exceed a gross exposure of 200%. Novare’s survey found that 87.6% of existing long/short funds meet this requirement, with 94.4% of market neutral funds also compliant
“If you take the more stringent requirements under the regulations which apply to retail funds, most managers already fit into the framework. However there are also other factors to be considered when a manager makes this decision, especially in relation to the investment flexibility they would want to have in future,” said Makwetu.
