The South African hedge fund industry grew its assets by an unprecedented 30% last year to end the year with R113.01 billion under management from R86.93bn at the end of 2021.
Speaking at annual hedge fund statistics released by the Association for Savings and Investment South Africa (Asisa) yesterday, Hayden Reinders, the convenor of the Asisa hedge funds standing committee, said the industry had had to endure several lean years following the implementation of crucial reform initiatives.
This had resulted in comprehensive regulations and the consolidation and closure of funds.
The number of hedge funds in South Africa has stabilised at 216, a number maintained for the past two years.
“Seeing strong growth numbers for the industry is a welcome development and hopefully indicates that hedge funds in South Africa are increasingly being accepted as an important investment tool in mitigating market volatility,” Reinders said.
The industry attracted healthy net inflows of R5.33bn last year compared to the muted net inflows of R0.59bn in 2021, while having suffered net outflows of R2.45bn in 2020.
Reinders said they hoped the industry would achieve even better growth this year on the back of the amendments to Regulation 28 of the Pension Funds Act, which came into effect at the beginning of this year.
The amendments separate hedge funds and private equity investments, allowing local pension funds to invest 10% of assets into hedge funds, and 15% into private equity investments.
Asisa said in 2015, South Africa became the first country in the world to implement comprehensive regulation for hedge fund products.
The regulations provided for two categories of hedge funds, namely Qualified Investor Hedge Funds and Retail Hedge Funds. Hedge funds fall under the Collective Investment Schemes Control Act (Cisca) and were deemed regulated collective investment schemes, just like unit trust portfolios.
According to Reinders, the amendments enabled hedge funds to operate on a more level playing field, which should result in stronger inflows.
“Most pension funds are nowhere near the 10% maximum, which means there is plenty of room for growth.”
He said 37% of assets under management were held by Retail Hedge Funds at the end of December last year, while Qualified Investor Hedge Funds held 63% of assets.
Asisa said the net inflows last year were predominantly driven by Retail Hedge Funds, which attracted net inflows of R4.1bn. Qualified Investor Hedge Funds, on the other hand, recorded net inflows of R1.14bn.
Reinders explains that Linked Investment Service Providers (Lisps) – also known as collective investment scheme (CIS) platforms had become more willing to offer retail hedge funds, making them more accessible to investors.
In addition, he said, some of the bigger hedge fund managers were investing in distribution and business development teams to grow their market share.
Hedge funds in South Africa were classified according to their investment strategies. The most popular hedge fund strategy in South Africa was said to be the Long Short Equity. At the end of last year, 59.2% of retail money was invested in Long Short Equity Hedge Funds and 45% of qualified investor money.
At the beginning of this month, Emma Pretorius, business development manager at Amplify Investment Partners, said hedge funds were often overlooked by investors when looking to mitigate risk in their portfolio, but many hedge fund strategies could play a crucial role in helping to protect a client’s portfolio against large pendulum-like swings.
“Why is this important? Because portfolio volatility eats away at compounded returns since large losses reduce your capital base, and you have to make more than you lost just to get back to your original capital level,” Pretorius said.
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