The South African hedge fund industry is relatively young, having launched around 1995. Twenty years later (2015) hedge funds became a regulated product in South Africa, which means they can now be marketed and distributed to retail investors. This is a major milestone even on a global scale. The new regulation is seen as world-class standard and has been many years in the making. The hedge funds are now subject to the regulatory oversight of the South African Financial Services Board. The manager is required to register as a Collective Investment Scheme ["CIS"] manager under CISCA, the South African Collective Investment Schemes Control Act.
Since the promulgation of the new regulation, hedge funds have been transitioning into the regulated space, and most fund managers say it as been a seamless procedure. Of course, given the complexity of hedge fund products, there are still a number of administrative issues sitting in the background like daily pricing and daily liquidity and how to effectively get hedge funds onto the large retail distribution platforms.
Attractive longterm performance
Longterm performance of South African hedge funds has been attractive. Over a three-year basis, almost all South African hedge funds have been true to their mandates and have generally offered attractive risk-adjusted returns. This is also noticed from international investors who come to Johannesburg and Cape Town from places like Europe or the US, which is a long way to come for due diligence.
Most of the South African hedge funds are still relatively small, certainly compared to their long-only and offshore peers, but this also means that they are flexible and able to trade around their positions, and generally far away from capacity limitations.
Prior to the transition, hedge fund managers were not permitted to openly market funds. One of the promises of getting hedge funds into a regulated framework and opening them for retail investors has of course also been to get new buyers and grow AUM, but nobody would have thought this would happen immediately.
Will South Africa go the UCITS way?
What could also happen over the long term is a further evolution of the South African hedge fund industry similar to UCITS in Europe (page 8) where the bulk of the inflows is actually a switch of institutional clients into these more regulated products that offer more transparency, slightly more risk restrictions, more frequent pricing, and as such you could argue more of an investor-friendly product. On the retail side, the industry will put a strategic focus on educating the end clients and foremost the IFA community to understand hedge fund products and be comfortable with them.
This Roundtable, sponsored by SANNE Group and Eurex, took place in Cape Town with:
Simone Blanckenberg, COO, Tantalum Capital
Craig French, Product Specialist, Visio Capital
Heinrich Jansen van Rensburg, COO, Fairtree Capital
Jean-Pierre Matthews, Principal and Head of the Investment Committee, Absa Alternative Asset Management
Markus-Alexander Flesch, Global Head Sales Equity & Index Derivatives, Eurex
Ruard Buys, Co-Founder, Marble Rock
Richard Murray, General Manager, IDS Management Company
Tony Christien, Divisional Director, SANNE Group
The group also discussed:
A very long education and demystifying process on hedge funds needs to happen in South Africa as all hedge funds are now regulated and can be offered to retail. How is the industry tackling education? (page 9-11, 14, 21-22)
Opportunities for South African hedge funds in multi asset investing, FX, credit, commodities (particularly agriculture businesses and soft commodities), tourism, and "quantamental" strategies
Size and opportunities for investors to participate in the informal cash economy in South Africa (page 18)
Why will the new Bilateral Margining or "Margin for Non Cleared OTC Derivatives" regulation break existing client-prime broker relationships? What is the industry doing about it? (page 19)
Repo as a new asset class: Eurex' new Total Return Future gets tailwind from regulations and investor demand (page 20)
Innovative ways to brand an alternative investment company (page 22)
How to get daily pricing and daily liquidity on hedge funds (page 24-25)
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