South Africa’s hedge fund industry grew assets by 18% in 2021 to R86.9bn compared with 2020, thanks to improved performance and greater marketing of retail funds to a broader investor base. This is according to Hayden Reinders, hedge fund standing committee convenor at the Association for Savings and Investment South Africa (Asisa).

Reinders said hedge fund managers were marketing their retail funds to a much larger client base than before.

Speaking at the annual Asisa statistics release, Reinders said that this was despite fund consolidations and closures, which meant the number of hedge funds fell from 233 to 216 during the year.

Reinders said that when the regulators introduced comprehensive regulation of hedge funds in April 2015, managers had the option of classifying their funds as either retail investor hedge funds (Rifs) or qualified investor hedge funds (Qifs).

Qifs are focused on the institutional market and require a minimum investment of R1m, as well as a ‘solid understanding of the investment strategies deployed by hedge funds’.

Regulators handle Rifs more strictly regarding investments and leverage, but fund managers can sell them to anyone who can afford a R50,000 lump sum, sometimes less.

Net inflows

Reinders said net inflows into the sector were a modest R590m, though this was a substantial improvement on the R2.45bn outflows in 2020.

‘But the net inflows were driven entirely by Rifs, which attracted R1.63bn,’ said Reinders. ‘Qifs had net inflows of R1.04bn.’

An obstacle to hedge fund growth is Board Notice 90 issued by the Financial Sector Conduct Authority (FSCA) in 2014. The notice does not allow long-only unit trusts – even those with an unencumbered balanced or flexible mandate – to invest in Rifs. However, life funds and segregated pension funds are already allowed to invest in hedge funds.

Reinders said that Asisa is negotiating the removal of Board Notice 90 with the FSCA and expects the regulator to release a draft statement for public comment soon.

 Long/short equity funds dominate the South African hedge fund industry. These funds typically have net exposure of between 40% and 60% in equities and account for 56.9% of Rif assets and 53.5% of Qif assets. The category also includes market-neutral funds, which aim to have almost no net long exposure.

Fixed income accounts for 30.7% of Rif assets, but just 6.7% of Qif assets, while multi-strategy, or multi-asset, hedge funds account for 12.3% of Rif assets and 38.4% of Qif assets.