Hedge fund industry assets grew to R68.6 billion for the 12 months ending June 30, up from R62 billion for the previous 12 months, according to the Novare Hedge Fund Survey 2016, a comprehensive annual review of the South African hedge fund industry.
Equity market-neutral strategies showed the strongest growth increasing from 8.7% to 12.6% of total assets due solid performance as the style performed better in the recent sideways markets in South Africa. Increased flows to the strategy from fund of funds and institutional investors chasing performance, added to growth.
Equity long/short strategies remain the most dominant, increasing from 60.9% to 61.6% of total assets.
Fixed income and multi-strategy funds lost some ground, decreasing from 14.1% to 13%, and 8.4% to 7.2%, respectively. Volatility arbitrage remained relatively unchanged (1.5% to 1% of total assets).
The survey showed a marked shift in capital flows from the industry’s largest funds to tier II managers.
In 2016, around R800 million was allocated to funds managing more than R1 billion in assets. This was down from R3,5 billion the previous year. This year, funds managing between R500 million and R1 billion in assets, attracted R3,5 billion in new flows, having experienced net outflows in the previous period.
From a returns perspective, the largest fund managers (managing over R2 billion in assets) delivered 5.9% on average. While the highest returns came from managers with between R1 billion and R2 billion in assets under management, delivering an average of 10.9% over the period. Tier II managers (those with between R500 million and R1 billion in assets under management) also performed well with a return of 9.5%.
One theme to emerge is the importance of manager experience in attracting investor interest. Hedge fund managers with more than 10 years’ hedge fund experience (not counting previous long-only investment management experience) manage 55% of the industry’s assets. Close to 80% of assets are managed by managers with more than five years hedge fund experience.
The number of funds hard closed for new investments increased from 7.1% to 15.9%, showing managers’ reluctance to dilute returns, preferring instead to focus on satisfying existing investors’ return expectations.
The average size of funds to hard close tends to be between R1,5 billion and R2 billion in assets under management, according to Eugene Visagie, head of hedge fund investments at Novare.
The survey is the first to cover the local hedge fund industry in its new regulated form under the Collective Investment Schemes Control Act (CISCA) where funds are required to register with the Financial Services Board (FSB) as qualified investor funds (QIFs) or retail investor funds (RIFs).
Contrary to managers’ indications in last year’s survey where there was overwhelming support for RIFs, more than two thirds (67.8%) of managers elected to register as QIF structures, while 32.1% have chosen RIFs.
“It has been an interesting time for the hedge fund industry,” says Visagie. “We are faced with an industry that is still in the process of transitioning and adapting to the regulated environment before the effect of the regulation will truly be noticed.” Copyright. HedgeNews Africa – October 2016.
To view the full survey, click here.