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  FINANCIAL ADVISOR'S VIEW

Hedge fund data in the public domain, at last

Greater transparency in the hedge fund industry will lead to higher levels of trust.

This week the Financial Services Board (FSB) released an update on the registration of hedge funds in South Africa. See the link here.

In February last year the minister of finance announced that hedge funds would be registered as collective investment schemes. All South African hedge fund operators were required to apply for registration as hedge funds in accordance with the Collective Investment Schemes Control Act, No. 45 of 2002 (“CISCA”), in order to continue operating.

In terms of the new law hedge funds wishing to register with the FSB are obliged to either register a collective investment scheme management company , or register as a third party fund with an existing collective investment scheme management company.

At Rosebank Wealth Group we welcomed this week’s publication of this data, including the list of registered funds and assets under management in the industry.

In our view, greater transparency in the hedge fund industry will lead to higher levels of trust and hopefully, in the longer term, a better understanding of how hedge funds can be used by investors to protect capital. 

Up until the new regulations came into force, hedge funds were not obliged to register with the FSB in order to operate, although hedge fund managers had to be appropriately qualified, which included registering with the FSB. There was also no requirement for hedge funds to disclose either their performance or risk statistics and hedge funds were not permitted to advertise their funds to the general public.

The result of this was that it was very difficult for interested investors to get an accurate feel for the size and shape of the hedge fund industry. The only information available was provided by those hedge fund managers willing to disclose details of their fund performances. 

In our view, including a quality hedge fund in a portfolio of assets is likely to reduce volatility and improve both diversification and capital preservation, with better risk adjusted returns. We have, where appropriate, been using hedge funds in our clients’ portfolios for close on ten years.

However, while we monitored a select range of hedge funds very closely, and could compare the return and risk statistics with regulated unit trusts and benchmarks, it was impossible to compare the results of our chosen hedge funds with peer group funds that elected not to disclose their results.  

In the same way, hedge fund commentators and those seeking to understand the hedge fund sector were obliged to either make educated guesses about the number of funds in the sector and the total assets under management or refer to surveys which only included hedge funds that chose to participate.

The FSB report released this week showed that the assets under management of registered hedge funds to date is R73 billion. This figure is made up of R12 billion invested in “Retail Investor Hedge Funds” (those that are obliged to operate under relatively more stringent regulations) and R61 billion invested in “Qualified Investor Hedge Funds”, (those with a higher stipulated minimum investment, longer redemption periods and less stringent risk requirements, more suitable for experienced investors and institutional investors).

The report indicated that as of the end of August 2016 there are a total of 280 registered funds; 109 Retail Investor Funds (RIFs) and 151 Qualified Investor Funds (QIFs). As the FSB figures show, the number of RIFs is disproportionate to the assets invested in these funds and possibly is an indication of the hedge fund industry’s expectations of growth in the sector.

We were surprised by the assets under management figure of R73 billion as it only represents those 280 funds that have registered. We would estimate the total list of the number of hedge funds currently available in South Africa as closer to 375. This means that about 100 funds still have to go through the process of registering with the FSB. However, the R73 billion is already the size of the hedge fund market in South Africa (as at December 2015), as surveyed by Novare during their annual survey of the industry.

However, it would appear at first glance that the figures released by the FSB could be overstated due to double counting. The list of 280 funds released by the FSB includes the names of 26 “Fund of Hedge Funds”, which are hedge funds that invest in other hedge funds. It is possible that the assets in all the funds have simply been added up to make the figure of R73 billion quoted in the press release.

Funds of Hedge Funds are expected to play an important role in our growing hedge fund sector, particularly in the retail sector. The rationale for a hedge fund of funds is that by carefully combining hedge funds with different mandates and strategies together, the performance is enhanced and the overall risk reduced.

A summary of the figures released by the FSB is in the table below.

hedge-fund-table

Source: FSB Press Release

FSB stats show that Novare Collective Investments was the first Management company to have its funds approved by the FSB and has 37 portfolios in total, with IDS the second to be approved, with a total of 81 portfolios.

We are of the firm belief that many investors’ portfolios would benefit from an allocation to a well-managed hedge fund portfolio and welcome the increasing transparency of the industry which is the direct consequence of regulation.

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Mduduzi Luthuli

Mduduzi Luthuli

Luthuli Capital (Pty) Ltd
Moneyweb Click an Advisor
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