Johannesburg – The hedge fund industry in South Africa is here to stay and can no longer be ignored by investors – whether institutions, individuals or corporates, according to the 2016 Novare Hedge Fund Survey released on Friday.
The survey is now in its the 13th edition and the period under review was July 1 2015 to June 30 2016.
The survey found that the South African hedge fund industry’s assets under management have grown to R68.6bn, increasing mostly due to solid returns and subsequently showing an increase in returns of more than 10% over the last year.
On average, hedge funds with more than R2bn returned 5.9%. The larger returns were seen in funds with between R1bn and R2bn – returning 10.9%. Funds between R500m and R1bn returned 9.5%.
A total of 53 asset managers, collectively managing over 106 uniquely mandated hedge funds, participated in the 2016 survey. Funds which elected not to be classified as hedge funds in terms of a new regulations were not included in the survey.
“It has been an interesting time for the hedge fund industry,” said Eugene Visagie, head of hedge fund investments at Novare.
He explained that last year saw the inclusion of hedge funds under the regulation of the local Collective Investment Schemes Control Act (Cisca). One of the main objectives of the regulation of hedge funds by National Treasury is the monitoring and measuring of systemic risk while enhancing product requirements to protect investor interest.
Under the new regulation, Cisca classifies hedge funds in two categories, namely retail investor funds (RIHF) – which have more stringent regulation requirements – and qualified investor hedge funds (QIHF).
“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,” said Visagie.
QIHFs beating RIHFs
More than two-thirds (67.8%) of managers elected to be QIHFs and 32.1% are RIHFs. Novare said this is an interesting phenomenon as the 2015 Novare survey indicated an overwhelming support for RIHFs when managers were asked which option they would select.
Industry firsts
The period under review saw the first daily dealing hedge fund launched under new regulations.
“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,” said Visagie.
Decline in inflows
Funds that were established during the 12 months ending June 2016 attracted R722m worth of assets – which is lower than the R1.4bn from last year.
According to Visagie, this could have been due to the change in regulation, investors not being sure of which structure a hedge fund will adopt under the new regulation and whether the adopted structure will be compatible with their structure.
Equity market neutral funds take the lead
In terms of assets under management (AUM), most of the inflows were to equity market neutral funds. Novare said this is due to the increased appetite in the strategy given the “choppy sideway market” – markets characterised by heightened volatility – in the measured period.
“It is apparent that this has become the strategy investors have taken advantage of due to solid returns. This has also been observed in the strong returns experienced by pair trade equity market neutral managers,” the report states.
“Multi-strategy received the bulk net outflows as certain funds underperformed, leading to investor redemptions. No net flows were received into commodity strategies.”
Funds with more than R2bn in assets continued holding the most industry assets, showing an increase from 74.9% to 79.5%. Funds between R1bn to R2bn halved over the same period from 8.4% to 4.2%, mainly driven by growth in those that reached the R2bn threshold. According to the Novare report, this is a reflection of the growth and stability of local hedge funds regarding size.
Decreased fees
The debate regarding fees is on-going between managers and investors, the report points out. For the first time under the new regulation, hedge funds will have to disclose their Total Expense Ratio (TER) to the public.
Hedge funds have 12 months to disclose these fees following the launch of the fund in the regulated space.
“We have seen a decrease in annual management fees combined with funds employing a higher hurdle rate for performance fees,” said Visagie.
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.
The report points out that the local hedge fund industry does not follow the typical 2% annual management fee (AMF) and 20.0% performance fee ratio. Instead a 1.0% AMF and 20.0% performance fee ratio is the popular charge.
Experience still key
The report found a broader trend, as confirmed by investors, is a continued emphasis on track record and experience. About 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,” said Visagie.
Capacity
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 focusing on satisfying existing investors’ return expectations.
Multiple prime brokers
There has been an increase in funds which employ the services of a prime broker. In 2014 there were 10.2% of funds which 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, according to the report.