After more than a decade of debate, hedge funds are finally available to the SA public.
SA’s hedge funds have acquitted themselves well so far.
Over the past 10 years, according to the industry magazine HedgeNews Africa, long/short equity funds have given an annual return of 10.9%, compared with 9.7% from domestic equity unit trusts, while fixed income hedge funds have done even better with an 11.1% return compared with 7.6% from the all bond index.
Last year, the finance minister at the time (Nhlanhla Nene) declared that from April 1 2015 all hedge funds would be deemed to be collective investment schemes — the legislation which covers regular unit trusts, real estate investment trusts and participation mortgage bond schemes.
So far hedge funds with R73bn of assets under management have been registered.
Out of the 269 funds, 112 are available to the public as retail investor funds (RIFs).
Most are not from the well-known fund houses: a few are from the emerging second tier such as 360ne, Truffle, Visio, Mazi and Laurium. Sanlam is the only large house with a comprehensive range of products, though it won’t win any award for clear labelling as its funds have names such as Xi, Sigma, Lambda and Pi.
Investec has two hedge funds but both are qualified investor funds (QIFs) — which means they can only be sold to institutions or to investors prepared to invest at least R1m upfront.
A large majority of the money in approved schemes (R61bn) is in QIFs, with R12bn in RIFs.
Peregrine group CE Jonathan Hertz says that it made sense for funds which are already well-established, and no longer in asset-gathering mode, to register as QIFs. The Peregrine Capital range, for example, will operate entirely under the qualified investor regime.
Similarly, the respected Coronation Presidio Fund, which is closed to new business, will be a QIF. It, however, still has to complete the regulatory process.
Udesh Naicker, head of the hedge funds department at the Financial Services Board (FSB), says it is appropriate to take a lighter-touch approach to QIFs, which have no restriction on the levels of gearing or on investment strategy, provided that it is fully disclosed to investors.
Retail funds, on the other hand, have a tight restriction on leverage — regardless of strategy or whether they operate in the equity or fixed income markets. No retail fund can be more than 200% geared (see graphic).
So a classic market-neutral fund that is 100% long and 100% short would just fall into the rules. There are also rules restricting retail funds to no more than 30% exposure to any single counterparty.
The only exception is when the counterparty is a bank, in which case there is no limit. Retail funds of hedge funds and direct retail funds cannot invest in QIFs.
Naicker says that SA is the first country to regulate hedge funds as a product using the Collective Investment Schemes Control Act. It is more common to regulate the industry by regulating the managers themselves.
And regular unit trust management companies have been forced to set up separate schemes for hedge funds.
Novare had the first registered scheme, which also hosts niche businesses such as Tower and Corion as well as its associate company, Matrix. The big gorilla of the hedge fund management companies is IDS, soon to be renamed Sanne (pronounced Saan) which has no funds of its own but which houses some cottage businesses such as Steyn Capital, Tantalum and Anchor, as well as the comprehensive Fairtree range.
Eugene Visagie, head of hedge funds at Novare, says the FSB is entirely even-handed and does not make the registration process any easier for the large financial conglomerates.
"The challenge now for the management companies is to teach intermediaries exactly what to expect from hedge funds. Some still equate them to Ponzi schemes."
He argues that many pension funds which have not invested in hedge funds before will feel more comfortable investing in the more regulated environment around RIFs.
Simon Peile, who runs the Sygnia Fund of Hedge Funds, says many of his institutional clients are still happy to invest through the Sygnia life licence and its funds will still be available on this platform.
So far Sygnia has just registered a Moderate Qualified Fund of Hedge Funds, and only plans to register a retail fund of hedge funds once a critical mass of underlying retail hedge funds has been registered.
Funds of hedge funds still make sense for beginners with no experience of selecting hedge funds. Sygnia, Caveo (now wholly owned by Investment Solutions) and Mayibentsha all have decent products, aimed at different risk profiles from cautious to aggressive.
Royce Long, a director of hedge fund manager Obsidian Capital, admits that some of the disasters which hedge funds have been through are still remembered, such as multibillion losses at Amaranth Advisors, Tiger Funds and, most notoriously, Long-Term Capital Management.
But Long says hedge funds give access to a number of strategies that are uncorrelated with traditional equity and bond investments. Hedge funds can exploit the possibility of a reversion in the price of overvalued shares by short selling (see box).
He says long/short equity funds provided greater capital protection in the global financial crisis than traditional SA equity funds.
Yet they also matched these funds and the all share itself in the subsequent bull market. Fixed-income hedge funds have outperformed their long-only counterparts even more comprehensively.
He says that the short side of the market is less efficient than the long side as far fewer investors can sell short so there is less coverage of these opportunities; few stockbrokers are prepared to give "sell" recommendations, in any event. And as hedge funds still have such a tiny proportion of total industry assets they can adjust their positions faster.
Visagie says it was not easy to keep up with long-only equity funds when the JSE had strong upward momentum from 2009/2014. But in a lower-growth environment, with a sideways or even downward moving market, hedge funds will have more scope for relative outperformance.