Hedge fund industry grows assets to R86.93 billion

Assets under management (AUM) by regulated hedge funds in South Africa grew 19%, while the number of funds continued to decline last year, according to figures released by the Association for Savings and Investment South Africa (Asisa).

AUM rose from R73.27 billion to R86.93bn at the end of December 2021. Further consolidation and fund closures saw the number of funds decline from 233 at the end of 2020 to 216 at the end of 2021.

Hayden Reinders, the convenor of Asisa’s Hedge Fund Standing Committee, said the reduction in funds continues to be driven by fund managers consolidating their product offerings into qualified investor funds (QIFs) or retail investor funds (RIFs).

QIFs require a minimum investment of R1 million and are open to investors with a solid understanding of the investment strategies deployed by hedge funds and the associated risks.

RIFs are more strictly regulated in terms of the investments and the risks that they are allowed to take and are open to all investors who can afford the average minimum lump sum investment of R50 000.

Hedge funds attracted muted net inflows of R0.59bn last year after net outflows of R2.45bn in 2020.

However, the net inflows were driven exclusively by RIFs; QIFs recorded net outflows of R1.04bn.

‘Playing field is uneven’

Reinders said hedge funds continue to be hamstrung by Board Notice 90, which prevents long-only unit trust portfolios from investing in hedge funds even though they are also regulated as collective investment schemes.

“Asisa has been engaging with the FSCA on this, and we expect the regulator to release a draft standard for public comment soon. We also expect the amendments to Regulation 28 of the Pension Funds Act to be finalised shortly, which will hopefully provide the hedge fund industry with its own percentage allocation in pension fund portfolios, rather than sharing in a broader allocation to alternative assets.”

Once these regulatory changes have been implemented, “hedge funds will be able to operate on a more level playing field, which should result in healthy inflows”, Reinders said.

Popular hedge fund strategies

Hedge funds in South Africa are classified according to the following investment strategies:

  • Long/short equity funds generate most of their returns from positions in the equity market regardless of the specific strategy employed, such as “long bias” and “market neutral”.
  • Fixed-income funds invest in instruments and derivatives that are sensitive to movements in the interest rate market.
  • Multi-strategy funds do not rely on a single asset class to generate investment opportunities but blend a variety of different strategies and asset classes with no single asset class dominating over time.
  • Other funds, which apply strategies that do not fit into any of the other classification groupings.

The most popular hedge fund strategy in South Africa is equity long/short. At the end of 2021, 56.9% of retail money and 53.5% of qualified investor money was invested in funds that followed this strategy.

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