Hedge funds in South Africa – Why you need to invest
Hedge Funds: From Financial Elite to Retail Investors
Hedge funds have traditionally been the domain of the financial elite, but that is changing. Increasingly, both local and international retail investors are gaining access to these investment vehicles.
This shift is being driven by greater accessibility and growing interest among individual investors, according to Matthew Pouncett, Equity Analyst at Laurium Capital.
He discussed the democratization of hedge funds in a recent interview on Business Talk with Michael Avery.
Retail Investor Hedge Funds (RIHFs) on the Rise in South Africa
Pouncett highlighted that the investment landscape in South Africa is evolving, largely due to the growing popularity of Retail Investor Hedge Funds (RIHFs).
These funds are designed to offer broader access to hedge fund strategies, typically reserved for institutional investors.
Why Invest in a Retail Investor Hedge Fund (RIHF)?
One of the key advantages of investing in a hedge fund is its ability to short-sell stocks that are expected to decline in value and /or reduce risks associated with the fund’s long positions.
Unlike most equity or balanced funds, which follow a long-only strategy (buying stocks with the expectation they will rise in value), hedge funds can generate returns by profiting from falling stock prices.
This provides investors with an opportunity to benefit from both rising and falling asset values.
Pouncett provided a clear example of how this works:
“If you invest R100 in a long-only equity fund, the manager will put that money into securities they believe will outperform the market. That’s all they can do,” said Pouncett.
“However, we as hedge fund managers can take that same R100 and invest it in long positions on stocks we think will perform well, but we can also short-sell R50 worth of shares we believe will underperform.”
This gives Laurium Capital R150 worth of potential returns while only exposing the investor to 50% of the market risk, Pouncett explained.
Democratizing Access to Hedge Funds
Recent regulatory changes in South Africa, such as reducing the minimum investment threshold, have made hedge funds more accessible to a broader range of investors.
Laurium Capital now offers three RIHFs that are available to all South African investors:
- Laurium Market Neutral Prescient RI Hedge Fund
- Laurium Long Short Prescient RI Hedge Fund
- Laurium Enhanced Growth Prescient RI Hedge Feeder Fund
“In South Africa, we’ve created a category of hedge funds—Retail Investor Hedge Funds (RIHFs)—that include guardrails like capping the gross exposure to 200% and limiting the maximum position size per security,” said Pouncett.
“These measures make our funds easier to understand, less risky, and more accessible to investors.”
The Diversification Benefits of Hedge Funds
Another compelling reason to invest in hedge funds is their potential to enhance portfolio diversification. Hedge funds typically have a low correlation with traditional asset classes such as equities and bonds, meaning their returns are not closely tied to the performance of these markets.
As a result, adding hedge funds to a portfolio can help reduce overall portfolio volatility and improve risk-adjusted returns.
Because hedge funds employ a wide range of strategies—including long/short equity, market-neutral, and event-driven approaches—they can deliver returns that are less influenced by the ups and downs of the broader market.
This makes them an attractive option for investors seeking to diversify their portfolios and reduce the risks associated with traditional asset classes.
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