Unless you’re involved in the industry and have the requisite technical knowledge, you’ll probably enlist the services of an independent financial advisor to help you maximise the growth of your investments, and to structure your portfolio in a way that makes sense for your lifestyle.
The advisor is therefore a major gatekeeper to retail wealth, and they wield immense power in choosing where such wealth should be invested.
As an asset class, hedge funds can offer exceptional returns for increasingly minimal risk, but the way it stands now, the legislation makes it difficult – if not impossible – for advisors to give advice with respect to hedge funds or place their clients’ money into a hedge fund.
In the past, all hedge funds were unregulated – they could not be marketed to the general public and only institutional investors had access to them.
(The funds themselves might not have been regulated, but asset managers who operated in the hedge fund space were required to hold a special category of licence under the Financial Advisory and Intermediary Services [Fais] Act).
In 2015, however, hedge funds were declared to be a collective investment schemes, and as such they were drawn within the ambit of the Collective Investment Schemes Control Act (Cisca), becoming regulated financial products for the first time.
The new legislation classified hedge funds into two categories: qualified investor hedge funds and retail hedge funds. Hedge fund managers had been clamouring for the latter category for years, and one would have thought that the ability to market hedge funds to the general public in South Africa would have been an answer to their prayers.
In practice, however, this has not played out as expected.
Barriers to entry
The first problem concerns the relationship between hedge funds and funds of funds. A fund of funds is often the investment vehicle of choice for an advisor, but when the hedge fund legislation was updated, it wasn’t updated for funds of funds, and a fund of funds is therefore prohibited from investing in a hedge fund. This blocks at least one channel for retail investors.
Another popular option for an advisor is to invest a client’s money via a linked investment service provider (Lisp) platform, such as Momentum, Allan Gray, Sanlam Glacier or similar. There are problems for retail hedge funds on such platforms too. Only Momentum has thus far given the green light to single-manager hedge funds. But investors need to sign an additional risk-disclosure document, which immediately raises an unwarranted alarm.
The headache gets worse: despite the already slim pickings on Lisp platforms, an advisor is only allowed to place a client’s money in a hedge fund if that advisor is appropriately authorised to do so in terms of their Category 1 Fais licence.
Practically, however, very few advisors have worked in the hedge fund space and have the necessary experience – and gaining such experience after the fact is an onerous process. As a result, hardly any advisors in South Africa are authorised to render hedge fund services and provide advice in respect of hedge funds.
It’s madness. The marketing of retail hedge funds might be permitted by the legislation, but it means nothing if advisors are not permitted to do so, especially considering the barriers to entry presented by funds of funds and Lisp platforms, and there seems to be no one canvassing on behalf of hedge funds in South Africa.
Ultimately, the discourse surrounding hedge funds needs to change. Hedge funds are no longer the maverick investment products they once were; they’re simply a different asset class that should be available to everyone.
After all, additional diversification is an absolute necessity in the current low-return environment.
Wilhelm Landman is a director at AIP Capital Management.