Clarity on the regulation of hedge funds, referred to yesterday by Finance Minister Nhlanhla Nene in his budget speech, is expected to help the R54 billion industry meet the challenge of growing its asset base.
Mr Nene referred to range of amendments to laws that are in the offing, including those that relate to hedge funds. “We have strengthened regulations for banks, and will be doing so this year for insurers, derivatives and hedge funds,” he said.
According to Eugene Visagie, Portfolio Manager at Novare Investments, hedge funds will be declared collective investment schemes and be subject to the Collective Investment Schemes Control Act.
“Because most South African hedge funds operate as pooled investment vehicles, government’s proposal to subject them to the rules that apply to other collective investment schemes makes sense.
“This long awaited regulation has the potential to stimulate growth for South African hedge funds, while also giving investors access to a distinct way of managing capital which in the past was the only accessible by institutional and wealthy investors.”
Mr Visagie added that, despite the misconception that hedge funds are risky investments, South African-based funds are in fact relatively conservative with the focus on capital preservation. This is primarily due to the bulk of the assets allocated to these funds being invested by institutional investors.
“Hedge funds typically exhibit lower correlation with financial markets, which can reduce overall portfolio volatility when used in combination with other traditional asset classes such as bonds and equities.”
The main objective of the hedge fund regulation is to protect investors and to assist with monitoring systemic risk, while promoting the integrity of the industry.
Draft regulation proposes a two-tiered approach, with retail hedge funds open to any investor, and qualified funds – with less cumbersome regulation – that will only be available to qualified investors.
Retail hedge funds will be subject to stricter investment guidelines as well as more frequent reporting to ensure stronger investor protection.
Regulation will focus on enhancing risk management and compliance monitoring of hedge funds, with regular reporting to both the Registrar and investors.
“We expect that these measures will encourage additional investments into the South African hedge fund industry as the majority of the savings industry understands and is comfortable with collective investment schemes and related regulation that promotes integrity and enhanced transparency,” said Mr Visagie.