Recent research from Novare shows increasing maturity in the South African hedge fund industry, with second-tier managers managing between R500 million and R1 billion receiving the bulk of new inflows for the first time in five years.
These funds also showed strong returns in the 12-month period to June 2016, gaining 9.5%, whilst the best performance came from funds with between R1 billion and R2 billion under management, which gained an average 10.9%. Hedge funds managing more than R2 billion returned 5.9%.
Eugene Visagie, head of hedge fund investments at Novare Investments, said: “We are seeing asset managers maturing and hedge fund businesses becoming more mainstream. Managers have raised business assets and have diversified their income streams by adding other product offerings. We now see a healthy business mix that is robust, alleviating some of the business concentration risk.”
The survey focuses on single-manager, South African domiciled hedge funds that invest predominantly in South African financial markets. This year a total of 53 asset managers, collectively managing over 106 uniquely mandated hedge funds, participated in the survey, which is now in its 13th year. The research covered the 12 months to the end of June 2016.
A new trend saw large inflows for equity market-neutral hedge funds, accounting for almost R1.3 billion. These funds performed particularly well during the period and garnered attention from fund of funds.
“Market-neutral pair-trading strategies have become the strategy investors have taken advantage of due to solid returns,” said Visagie. “It tends to be a strategy of choice in choppy, sideways trading markets characterised by heightened volatility.”
The survey also saw a marked increase in the number of funds that were hard-closed and not taking allocations from new investors, from 7.1% to 15.9%, a sign of major hedge fund asset managers not wanting to dilute returns and rather focusing on satisfying the return expectations of existing investors.
The industry in general still had significant capacity, with 76.3% of funds surveyed open for new investments. Just 7.6% funds were soft-closed, or only accepting investments from current investors, down slightly from 9.5% the previous year.
Fund of funds remained the biggest allocators to the industry, down marginally from 57.3% to 56.5%. There was also a notable increase in pension-specific investments being made directly into hedge funds, with this allocation being spread across several funds, notably towards hedge funds with larger assets under management.
With the industry transitioning to a regulated hedge fund environment under the Collective Investment Schemes Control Act (CISCA), more than two-thirds (67.8%) of managers have elected to be categorised as qualified investor hedge funds, with just 32.1% electing to be retail investor hedge funds and 0.1% still undecided.
“Managers like the flexibility of the qualified investor funds and would like to be able to take investment opportunities as they arise without having the compliance restrictions such as 200% gross exposure, Board Notice 92, and monthly dealing that exist in retail funds,” said Visagie. “That said, we are still in the implementation phase of the new regulations and this could have skewed the result slightly. Many funds have just started transitioning in the last two months.”
In total, industry assets grew by almost 10% to R68.6 billion, due mainly to good performance from managers rather than net inflows from new investors.
Visagie said the muted new inflows were due to regulatory transition, which saw new investors hold off on capital allocations until funds registered in specific structures.
Visage anticipates stronger growth for the sector going forward as retail investors become more familiar with hedge funds and gain greater exposure to them.
“We are confident that the industry will see increased growth over the next 12-24 months,” he said. “There are a lot of people doing work on hedge funds who never looked at them in the past and who now agree with the merits of including them in a portfolio. That said, a lot of education still needs to be done to address various concerns.”
Novare noted that while many perceived hedge funds to be a specialist boutique industry, only 2.5% of industry assets is managed by “boutique” start-up managers (managers with less than R500 million in assets under management). The bulk of industry assets (38.4%) is managed by managers with between R10 billion and R100 billion in AUM. Almost all large institutional financial services groups in South Africa have a hedge fund offering, while a growing number of independent hedge fund managers have gathered significant assets under management and even extended into the long-only space.
Managers with between R5 billion and R10 billion in AUM manage 21% of total industry assets, while 16.8% is managed by those with between R2 billion and R5 billion in AUM.
During the review period, seven new funds were launched.
“It is a difficult time to launch new funds with all the new regulatory requirements, and we would estimate you need around R100 million to launch a new strategy,” said Visagie. “But we still expect talent to come forward as the industry grows.”
Novare also noted that hedge fund managers had “immense understanding and vast years of experience”, with 73.2% of industry assets managed by hedge fund managers with more than eight years’ of hedge funds’ experience. This did not take into account the years spent in the financial services industry working with traditional funds, prior to moving into the hedge fund space. Copyright. HedgeNews Africa – October 2016.