The Novare Investments South African Hedge Fund Survey for 2012 found that industry assets as at 30 June this year had reached an all-time high of R33.6 billion as the shift towards larger hedge fund managers with longer track records continued.
Although 14 new hedge funds were launched, the increase in industry assets came mainly from already established funds’ performance, rather than from new capital flows which survey participants said stood at only R461 million.
Carla de Waal, Head of Funds of Hedge Funds at Novare Investments commented: “There has been a clear shift towards larger managers. Those housing assets of between R1 billion and R2 billion received the lion’s share of new inflows, with net asset inflows to these managers exceeding R1.5 billion.
“Also indicative of the preference for larger managers was that hedge funds managing over R2 billion in assets represented 46.2% of industry assets – a significant increase from 33.7% in 2011 and 23.2% in 2010.”
Where strategies are concerned, equity long/short hedge fund managers were the largest recipients of capital, with most of the other strategies (equity market neutral, fixed interest and multi-strategy) losing capital on a net basis.
In performance terms, the South African hedge fund industry held up well over the past year, with strong returns from especially fixed interest and multi-strategy funds. “Hedge funds achieved strong returns with considerably less volatility than the long only market, supporting the view that hedge funds offer an attractive risk-return profile,” said de Waal.
Contrary to the assumption that smaller funds are better placed to exploit market inefficiencies, the strongest performers in the 12 months to end June were those with a larger asset base. Hedge funds with assets under management exceeding R1 billion delivered an average return of 16.1%, while those with assets of between R500 million and R1 billion delivered 12.8%.
While fixed interest hedge funds delivered an average return of 18.0% for the year, the importance of manager selection was highlighted by a large dispersion of returns ranging from 2.2% to 44.9%. Fixed interest hedge funds represented 19.9% of industry assets.
Equity market neutral funds (14.4% of industry assets) delivered returns of between -11.8% and 21.1%, with an average for the strategy of 4.9%. The equity long/short strategy, representing 44.9% of industry assets, returned 16.0%, and the multi-strategy 16.8%. The FTSE/JSE All Share Index returned 9.2% over the same period.
Funds of hedge funds held 66.3% of industry capital, with high net worth individuals and retail clients the next largest group of investors with 15.7% of assets. Pension funds and life funds held 5.8% and 6.6% respectively.
Said de Waal: “The low number of pension funds investing directly in hedge funds should be a concern, as most commentators expected an increase in allocations from pension funds following changes to Regulation 28. Hedge funds are still vastly underutilised and some investors such as pension funds are losing out on the benefits that an allocation to hedge funds can provide in a total portfolio context.
“More encouraging is that the recently announced framework for hedge fund product regulation marked the official entry of hedge funds into mainstream asset management in South Africa, building on the inclusion of hedge funds in pension fund regulation and providing the regulatory clarity that industry participants and asset allocators have long sought.”
* This report was prepared by Novare Investments