THE advent of retail hedge funds in SA is opening the way for investors to explore new avenues to wealth accumulation. Previously the preserve of pension funds, institutional investors and high net-worth individuals, hedge funds offer investors an additional tool to diversify portfolios.
Globally, hedge funds have suffered reputational damage in the wake of the 2008 financial crisis that has caused many international funds to bleed outflows amid poor performance. The costs associated with these instruments have also come in for criticism due to high performance and management fees.
The global picture, however, is in stark contrast with that in SA, where the Financial Services Board has kept a tight rein on the industry, introducing the world’s first hedge fund regulations, which place these funds under the authority of the Collective Investment Schemes Control Act.
According to figures from the Association for Savings & Investment SA (Asisa), hedge fund assets under management grew by R5.1bn in calendar 2015 to R62.1bn. It says the 10 largest hedge fund managers manage 71% of the industry’s total assets. "This means the bulk of hedge fund assets are invested in sizeable portfolios managed by well-established hedge fund asset managers with a consistent track record of success," Robert Foster, convener of the Asisa Hedge Funds Standing Committee, says in a February 2016 statement.
The industry body says that at the end of last year 61% of hedge fund assets were invested in "equity long/short" strategies. The HedgeNews Africa Long/Short Equity Index had delivered a performance of 17.1% for the year to the end of December 2015, 15.1% over five years and 14.5% over seven years. By comparison, the JSE all share index achieved a 5.1% return last year, 13% for the five years and 16.4% over seven years, while the SA Multi Asset Medium Equity category returned an average of 7.4%, 10.6% and 11.3% over the respective periods.
Fund administration specialist IDS-Sanne, which recently launched a regulated collective investment scheme management company hosting a number of local hedge fund managers, cautions that hedge funds should be treated as another asset class within a portfolio to reduce risk and not be considered as the only instrument in a portfolio.
"A clear understanding of what the fund objectives are is essential," says Ian Hamilton, group CEO (right). "The investment should not be looked at from a point of outperformance of other asset classes and requires professional advice on the merits of the investment in relation to the objectives and needs of the investor."
Regarding the negative publicity that was generated in the US market, he points out that it is an unregulated market that was open to abuse and fraud perpetrated by the likes of Bernie Madoff.
"SA had a taste of this with Herman Pretorius, who operated a Ponzi scheme that was headlined as a hedge fund.
"Now, with the industry being regulated, the investing public is assured that the fund cannot be used for fraudulent purposes."
Hamilton says the big advantage hedge funds offer is the ability to provide diversification of risk away from traditional long-only investments and that different hedge fund manager strategies and instruments can reduce the correlation to traditional equity and fixed-interest markets.
As always, the pursuit of higher returns has a concomitant risk of losses.
"Most of the South African hedge fund managers are far more risk averse than the historical big international names. This is because until the introduction of retail hedge funds in SA most of the investment money has come from pension funds, which are more risk averse than the average high net-worth investor," Hamilton says.
"The one big risk is the miss-selling of hedge fund products to the public.
"That is where the education and qualifications of investment advisers is essential as, in general, the investor is not going to have sufficient knowledge to understand the investment strategies of different hedge fund managers."
On the question of higher fees compared with traditional investments, Hamilton argues that hedge fund managers are more specialised and require specific approval from the Financial Services Board. By the same token, performance fees are calculated on absolute performance above a positive benchmark.
Hamilton suggests that the initial route for the public should be to invest in a fund of hedge funds, as this provides added risk diversification even though it comes at a price due to potentially higher fees.
But such funds cannot be offered overnight, "because a fund of hedge funds can invest only in single-strategy hedge funds and the registration or conversion process is taking time. So while a fund of hedge funds may be registered for sale, the underlying universe of investable funds will take time to convert."