South Africa counts around 135 domestic hedge fund management companies, predominantly within three strategies: equity long/short, market neutral and fixed income arbitrage. Over the past years, this highly qualified group of hedge fund managers has consistently outperformed the global and domestic markets, as well as their global hedge fund peers. Until October 2011, the South Africa single manager composite index is up over 7%, while the JSE all-share index was flat and MSCI Emerging Market Index lost almost 13%.

New access vehicles like the Nautilus Management Account Platform, which is the only managed account platform in the world owned by a stock exchange, make it now even easier for international investors to access South African hedge funds.

From a regulatory perspective, South Africa is surprisingly a couple of steps ahead of most other jurisdictions, as it has a stringent regulations of managers in place and recently, with the important Pension Regulation 28, has now also validated hedge funds as eligible asset class for longterm investment. Before Reg 28, hedge funds were considered an unlisted security and the total exposure was limited to 2.5%. That definition as unlisted has been removed and the threshold has been lifted up to a total of 10% that can be allocated to hedge funds.

South African pensions earmark significant funds for Pan Africa funds

The aforementioned Regulation 28 also allows an additional 5% of South African pension assets to be invested into Africa. As a consequence, a lot of highly skilled South African fund managers are looking up north into Africa in order to capture both the investment opportunities and the asset flows. South African institutions will move several billion dollars lines into Africa over the next few years, resulting in significant inflows for the managers dedicated to this region. The rich opportunity sets in Africa cannot be overlooked.

Africa's evolution as investment destination

Africa's roots lies in its debt markets. Investment banks have been originating and funding deals, and sometimes debt issues may be offered to the market on the back of those. Debt markets therefore dominate a number of African financial markets. The next evolutionary development involved moving down the capital structure as private equity players introduced mezzanine or convertible debt financing and pure private equity players emerged. The private equity deals were done primarily on the back of funding from the development agencies, and the subsequent roll out private equity type vehicles into the African market.

The next evolutionary step will be the further development of equity financing, which should enhance the depth and liquidity of listed equity markets on the continent and further allow international investors to participate in the Africa story.

The Opalesque 2011 South Africa was sponsored by IDS Group and took place in November at their office in Cape Town. We also thank Roundtable Series sponsor Custom House Group for their continued support. The participants:

1. Alexia Kobusch, Head of Risk, Nautilus Managed Account Platform
2. André Steyn, CEO, Steyn Capital Management
3. Bilal Haffejee, Head Fixed Income Prime Broking at Rand Merchant Bank
4. Bradley Anthony, Head of Distribution & Product Strategy, Fairtree Capital
5. Francois Cilliers, CIO, Novare Investments
6. Ian Hamilton, Chief Executive Officer, Investment Data Services Group

• What to consider when investing on African exchanges that are not recognized by the World Federation of Exchanges
• Why licensing a hedge fund in South Africa can be more onerous than with the U.K. FSA
• Strong corporate governance: literally all South African hedge funds have third party administration, third party custody, compliance consultants, risk monitoring, strong auditors and offer transparency with daily look through into their portfolios together with detailed risk reports
• Why a fund manager would want to domicile a South African orientated fund rather in Malta and not in Cayman
• How to assemble a portfolio of high quality African companies with an average return on invested capital of 46%
• Strategies how to make money in Africa beyond commodities

Matthias Knab
Director Opalesque
knab@opalesque.com

The Opalesque Roundtable Series offers unparalleled intelligence on the most important global hedge fund jurisdictions and their players. The Roundtable Series is a free publication from Opalesque and is continually updated. Please scroll down to view the full selection of our Roundtables - covering the globe!

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