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Industry body brings more clarity to hedge funds

Asisa classification standard will help investors to navigate their options.

For more than four years hedge funds in South Africa have been recognised as collective investment schemes, the same as unit trusts and exchange-traded funds (ETFs). Yet they hardly enjoy the same prominence.

Read: The bridesmaid of the local investment industry

To some extent this is because they are more complicated products, and not so easily understood. Investors see them as niche or risky, even when that isn’t the case.

Perhaps more pertinently, though, is that investors have never had any easy way to contrast and compare the various hedge funds in the market. There are around 300 hedge funds in South Africa, and the variety of strategies they can follow makes it very difficult for investors to know how they should be choosing between them.

Making things simpler

Last month the Association for Savings and Investment South Africa (Asisa) announced that it had finally formalised category definitions for local hedge funds that will begin to make this easier.

As Hayden Reinders, head of alternative fund administration at Prescient Fund Services and chair of the Asisa standing committee on hedge funds notes, this should make these products more approachable. “It should enable us to make more information available and explain this asset class better,” he says.

“There are different types of hedge funds, different risk profiles, and you are now able to compare these different funds within their categories.”

Investors will therefore be able to more directly compare funds that use similar approaches.

“Data from hedge funds in South Africa has historically not been widely available, making it difficult for retail investors to evaluate and compare like-for-like offerings,” explains Michael Kruger, investment analyst at Morningstar Investment Management.

“We welcome the increased transparency introduced by Asisa in grouping hedge funds with similar strategies or investment objectives together. Hopefully this will allow investors to better understand what is a rather opaque area of the investment landscape in order for them make an informed decision on whether to use these products.”

The detail on how hedge funds are classified is explained below:

Source: Asisa

While this development is an important step for the industry, it is not in itself sufficient to allow investors to properly compare their options. A significant issue that still needs to be dealt with is that there is no standardisation of how information is presented on hedge fund fact sheets, also known as minimum disclosure documents (MDDs).

“We have done an impact analysis on the things investors are looking for and MDDs came up,” Reinders acknowledges. “That’s the starting point for any investor – and when they pick one up, they need to immediately be able to see information like what sort of risk profile a fund has.

“We need to agree on the kind of language that we use on fact sheets to make it consistent.”

Performance figures

Another important consideration is that it is still impossible for investors to get comprehensive performance data on hedge funds that allows them to compare historical returns. The new classification standard will hopefully help in this respect as data providers can now break funds into categories for comparison.

However, that still requires the fund management companies to provide this data. A number have been slow to do so, but hopefully they will now have an incentive to be more forthcoming.

Morningstar notes that it only receives performance figures from around 70 hedge funds at the moment, but it hopes to add another 70 or so in the near future.

Read: Was this SA’s best fund last year?

“Data providers such as Profile Data and Morningstar have already announced that they can now use this Asisa classification framework to include hedge funds in their regular performance data reports,” says Jean Pierre Verster, CEO of Protea Capital Management. “That will go a long way in highlighting the performance of individual hedge funds in a transparent and comparable manner.”

An important part of this will also be allowing investors to place greater scrutiny on fees.

“Basic fees of hedge funds need to be competitive with comparable long-only funds, with performance fees only being levied when the hedge fund outperforms,” says Verster. “Hedge funds will only be able to justify above-average total fees if they deliver above-average performance.”

The new Asisa hedge fund classification standard is available on its website.

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