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SA Hedge Funds Classification – Aims to simplify assessment, comparison and selection

South African hedge fund managers have begun the process of categorising their hedge fund portfolios in line with the provisions of the new Hedge Fund Classification Standard, which was recently introduced by the Association for Savings and Investment South Africa (ASISA). The new ASISA Hedge Fund Classification Standard comes into effect on 1 January 2020.

According to Sunette Mulder, senior policy adviser at ASISA, the aim of classifying all hedge fund portfolios, including hedge fund of fund portfolios, into different categories is to make it easier for investors to assess and compare funds and to select hedge funds appropriate for their risk profiles and investment portfolios.

Background

In April 2015 South Africa became the first country to put in place comprehensive regulation for hedge fund products. The regulations provide for two categories of hedge funds, namely Qualified Investor Hedge Fund portfolios and Retail Investor Hedge Fund portfolios. As a first step, this required the hedge fund industry to convert their hedge fund products to structures that conform to the provisions of the Collective Investment Schemes Control Act (CISCA).

“The next step is for hedge fund managers to classify all hedge funds in line with the provisions of the ASISA Hedge Fund Classification Standard”, says Mulder. “The Standard is a key tool for investors and their advisers in that it provides a framework within which hedge fund portfolios with comparable investment objectives and investment universes are grouped together. The ability to compare like with like when making investment choices is critically important.”

The new Standard introduces four tiers

The first tier splits hedge fund portfolios into either Retail Investor or Qualified Investor portfolios. The second tier classifies hedge fund portfolios according to their geographic exposure. The third tier of classification is based on the manager’s investment strategy and the fourth tier of classification applies only to Long-Short Hedge Fund portfolios.

Mulder further says that new categories of classification will be considered when there are five or more hedge fund portfolios in either the Qualified Investor Hedge Fund or Retail Investor Hedge Fund categories with an identical or substantially similar objective and investment policy.

According to Mulder, once implemented, the new classification system will also make it possible for ASISA to collect its own reporting data on the hedge fund industry for the first time. ASISA currently collects and collates quarterly statistics for the Collective Investment Schemes (CIS) industry, excluding hedge funds.

The future of Hedge Funds

In a recent Business Maverick article, Herman Sandrock, head of distribution at Fairtree Asset Management comments that in the recent past industry players have complained that the complexity and high fees structures did not warrant an investment but now that traditional asset classes have delivered poorer risk-adjusted returns, hedge funds’ role as diversification tool can be better appreciated.

“One of the benefits of hedge funds is its ability to go long and short. To generate a return from shares going up and down” he says. “We’re investing in the JSE All-share index will follow just that with significant exposure to large stocks e.g. Naspers and Prosus hedge fund can generate returns from rising and falling shares prices”.

“Hedge funds can provide diversification through their asymmetrical return profiles, their ability to hedge out market risk, plus their use of leverage to enhance returns”, he concludes.

Comment

These proactive steps by ASISA should be welcomed as it provides a platform for self-regulation and monitoring. Failure to conform to the spirit and intent of investment products in earlier years by some players in the industry is one of the main reasons for the deluge of regulation that followed. By taking this initiative, ASISA makes conformance and fair treatment of clients achievable, particularly in assuring understanding and the ability to make an informed decision.

Click here to access the ASISA Hedge Fund, Classification Standard.

Click here to download the ASISA media release.

Click here to download the Afrikaans version of the ASISA media release.

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