New classification standard for SA hedge funds under way
South Africa was the first country to put in place comprehensive regulation for hedge fund products in April 2015
It will be easier for you to assess and compare hedge funds and to make appropriate investment choices when a new classification standard for hedge funds is put into place from January 2020.
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).
Sunette Mulder, senior policy adviser at Asisa, says 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.
SA was the first country to put in place comprehensive regulation for hedge fund products in April 2015. 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 funds in line with the Asisa Hedge Fund Classification Standard, Mulder says.
“The standard 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,” she says.
The four tiers
The standard provides for four tiers of classification. 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:
- South African portfolios invest at least 60% of their assets in South African investment markets.
- Worldwide portfolios invest in both South African and foreign markets. There are no limits set for either domestic or foreign assets.
- Global portfolios invest at least 80% of their assets outside SA, with no restriction to assets of a specific geographical country, for example the US, or a geographical region, such as Africa.
- Regional portfolios give investors at least 80% exposure to assets in a specific country, for example the US, or a geographical region, such as Africa, outside SA.
The third tier of classification is based on the manager’s investment strategy:
- Long Short Equity Hedge Funds are portfolios that predominantly generate their returns from positions in the equity market regardless of the specific strategy employed.
- Fixed Income Hedge Funds are portfolios that invest in instruments and derivatives that are sensitive to movements in the interest rate market.
- Multi-Strategy Hedge Funds are portfolio that over time do not rely on a single asset class to generate investment opportunities but rather blend a variety of different strategies and asset classes with no single asset class dominating over time.
- Other Hedge Funds are portfolios that apply strategies that do not fit into any of the other classification groupings.
The fourth tier of classification applies only to Long Short Hedge Fund portfolios. These portfolios are further categorised as follows:
- Long Bias Equity Hedge Funds. These portfolios will over time aim for a net equity exposure in excess of 25%.
- Market Neutral Hedge Funds. These portfolios are expected to have very little direct exposure to the equity market. On average over time net equity exposure should be less than 25% but greater than -25%.
- Other Equity Hedge Funds. This category is for portfolios that follow a very specific strategy within the equity market such as listed property or sector specific strategies.
Mulder says 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 industry, excluding hedge funds.