The South African hedge fund industry’s assets under management has grown to R68.6 billion, increasing mostly due to solid returns and subsequently showcasing an increase in returns of more than 10% over the last year. This is according to research released in the key findings of the 2016 Novare Hedge Fund Survey, a comprehensive annual review of the South African hedge fund industry.
“It has been an interesting time for the hedge fund industry,” says Eugene Visagie, head of hedge fund investments at Novare. Last year saw the inclusion of Hedge funds under the regulation of the local Collective Investment Schemes Control Act also known as CISCA. “Under the new regulation, hedge funds will be accessible to a broader investor base, however, 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.”
Highlights from the 2016 survey include:
QIFs are beating RIFs
More than two-thirds (67.8%) of managers elected to be Qualified Investor Hedge Funds (QIFs) and only 32.1% are Retail Investor Hedge Funds (RIFs). This was an interesting phenomenon as the Novare 2015 survey feedback indicated an overwhelming support for RIHFs when managers were asked which option they would select.
An exciting development was the introduction of the first daily dealing retail hedge fund, launched under the new regulation. “The daily dealing fund will most certainly be a keen focus and one to monitor, especially with regard to how the liquidity will be managed without impacting fund investments,” says Visagie.
Decline in inflows
Funds that were established during the 12 months ending June 2016 attracted R722 million worth of assets – which is lower than the R1.4 billion from last year. “An observation might be that 2016 saw less inflows into hedge funds, because of 1) the change in regulation, 2) investors not being sure of which structure a hedge fund will adopt under the new regulation and 3) whether the adopted structure will be compatible with their structure,” explains Visagie.
Equity market neutral funds take the lead
According to AUM, most of the inflows were to equity market neutral funds. This is due to the increased appetite in the strategy given the choppy sideway market in the measured period.
“We have seen a decrease in annual management fees combined with funds employing a higher hurdle rate for performance fees,” says Visagie. Fees have always remained topical and the hedge fund industry has not been exempt. For the first time, under the new regulation, RIHFs will have to disclose their Total Expense Ratio (TER) to the public. More than two-thirds (66.3%) of the funds charge an annual management fee of 1.0%, up from 58.1% the previous period, this has been as a result of those charging higher fees decreasing their rates.
Experience remains key
The broader trend, as confirmed by investors, is a continued emphasis on track record and experience. 73.2% of industry assets are managed by hedge fund asset managers with experience in hedge funds exceeding eight years (and more) of hedge fund specific experience. “This does not take into account the years spent in the financial services industry working with traditional funds, prior to their move into the hedge fund specific investment space,” Visagie adds.
There was a sizeable increase in funds which were hard closed from 7.1% to 15.9%. Meaning that the fund was not open to new investments. This was prevalent in major hedge fund asset managers not wanting to dilute returns and rather focus on satisfying existing investors return expectations.
Multiple prime brokers
There has been an increase in funds who employ the services of a prime broker. In 2014 there were 10.2% of funds who did not have a prime broker, whereas now only 7.6% of the funds are without a prime broker. There has also been a considerable increase in funds which make use of more than one prime broker, this is fuelled by restrictions in the regulation for prime brokers who are not a bank.
“One has to consider that the period under review was certainly not short of market excitement both on the local and global front. Headline events included to name but a few, the devaluation of the Renembi, S.A. having three different finance ministers in a space of four days, global markets defying the ‘January effect’, a rally in resources and the first Federal Reserve hike,” says Visagie.
“Hedge funds can no longer be ignored by institutions, individuals or corporates – indeed by all potential investors. The new regulation is a step in the right direction, and yet another confirmation that this industry is here to stay,” he concludes.
Click here to download the full survey.