New rules to stop money from leaving South African hedge funds

 ·18 Nov 2019

South Africa’s hedge fund industry is betting on new rules to help reverse a record drop in assets under management.

New guidelines from January will split funds into different investment categories and geographical exposure so local investors can make better comparisons.

They will also allow hedge funds to be stacked against long-only equity or fixed-income funds and help the industry body compile uniform data.

“This is the next evolution of where we are going,” said Hayden Reinders, the chairman of the Association for Savings and Investments South Africa’s hedge funds standing committee.

“We want to create awareness that a hedge fund is a different type of fund that can fit into different types of portfolios.”

Like their global peers, South African hedge funds are facing more competition from passive funds, while meagre returns have intensified scrutiny on fees.

Still, with only 2% of the country’s $150 billion in savings in alternative assets, the industry is counting on greater transparency and efforts to further open up who can invest in the funds to spur a revival.

“Globally if you look at the allocation of alternatives compared to more traditional funds, alternatives can account for as much as 8% of the total,” Reinders, who is also head of business development at Prescient Fund Services, said by phone from Cape Town.

“Conservatively in South Africa, the hedge fund industry could look to double.”

The industry is dominated by a few managers, with 10 of the largest funds overseeing 60% of assets, according to the Novare Hedge Fund Survey.

Companies like 36ONE Asset Management (Pty) Ltd. and Fairtree Asset Management (Pty) Ltd. run some of the biggest funds.

Total assets under management fell for a second year in 2018, plunging 25% to R47.1 billion ($3.2 billion), the survey found.

‘Fuzzy Area’

“Hedge funds over the last three to five years have had a torrid time,” even though many outperformed traditional asset classes, said Jean Pierre Verster, the chief executive officer of Protea Capital Management (Pty) Ltd.

His Protea South Africa Retail Hedge Fund returned a market-beating 24% last year, after deducting a 6% performance fee.

“Now that hedge funds must formally report net performance, it isn’t this ‘fuzzy area’ anymore” and critics will no longer be able to argue hedge-fund managers are “cherry picking” to show off their best performers, he said.

“Hedge funds must now get used to marketing themselves.”

For much of its history, the two-decades old sector was seen as a playground for high-net-worth individuals or qualified investors.

That was until four years ago, when South Africa became the first country to put in place comprehensive regulations for the industry. Those rules opened hedge funds to retail investors, differentiating them from professional players, while enhancing fee disclosures.

“There might be some teething problems with some funds trying to be all things to all people and not committing to a strategy,” said George Tsinonis, head of investment analytics at investment firm RisCura. “However, I think that will be rare.”

‘Risk Management’

Rules to educate investors alone cannot drive the growth of the industry, said George Herman, director and chief investment officer at Citadel Wealth Management.

“Improving risk management and transparency, a greater focus on aligning manager and investor interests, and lowering fee structures” are among the most important trends that will shape the hedge fund landscape, he said.

Protea Capital Management’s Verster expects some local hedge funds to change focus and look outside of South Africa.

“You very rarely find a South African hedge fund focused on global markets,” he said.

“Because so many of the established managers have had above-average returns in the last three to five years some might decide to try their hand at implementing their strategy globally. That would be quite interesting.”

Read: 8 things feeding South Africa’s massive debt crisis, according to economists

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