Blue Chip Issue 84

HEDGE FUNDS
BLUE
CHIP
The MOST
exclusive club is
open, but where
is the door?
By Mike Titley, Business Development Fund Manager
For many years, hedge funds in South Africa were unregulated
and available to only the wealthiest via complicated
structures. This changed with the introduction of the hedge
fund regulation under CISCA in 2015, essentially opening
the door to retail investors. With South African hedge funds being
some of the most regulated and transparent in the world, the black
box risky label that has been internationally attached to the asset
class is unwarranted. Fortunately, hedge fund managers in South
Africa have proven themselves to be more conservative than their
international counterparts – there are several experienced South
African hedge managers in the country, including Laurium Capital,
that have 10- to 20-year consistent track records to prove it.
Hedge funds are obviously not without risk, and it is very
important how this risk is managed. Risks like liquidity, leverage
limitations and net positioning are all regulated and integrated
into the portfolio risk management daily. The relatively small size
of the hedge fund industry (R73-billion according to the 2020
HedgeNewsAfrica report) versus the long only R3-trillion makes
it highly flexible when taking positions. As hedge funds always
carry a sizeable cash position, the fund does not need to sell a
position to take advantage of a new opportunity. This magnifies
the nimbleness to exploit the full breadth of the liquid market and
its broad investable mandate.
Reporting has significantly improved with the regulation
of hedge funds. Governed by CISCA, hedge funds are required
to report fact sheets, total expense ratios and positioning. A
concerted shift has been made by the South African hedge fund
industry to meet investors requests for more information.
The combination of the improved regulation, successful
performance and improved understanding of hedge funds is
driving increased demand in South Africa currently. In our recent
webinar poll on hedge funds, 78% of the audience voted that
hedge funds should receive a weighting of between 5% and 20%.
The question asked by these interested parties now is: how does
one access hedge funds? Where is the door?
Given the current wording of Board Notice 90, unit trusts cannot
make an investment into a hedge fund. The industry remains
hopeful that this will be amended in the much-anticipated revamp
of Board Notice 90. In the interim, the inclusion of hedge funds
for financial advisors can either be done directly into the fund or
via a model or wrap fund. Going direct can be quite onerous for
retail investors given the minimum investment requirements and
the choice of funds. A better solution would be gaining access
to a pre-approved select list of funds via the LISP platforms. This
would provide comfort to allocators that the hedge funds have
passed due diligence processes and carry the LISP’s approval. They
can then make a choice of the hedge fund strategy they require
and split their allocation across a few funds. Although unlimited
for discretionary investors, Regulation 28 limits single manager
hedge funds allocations to 2.5% and fund of funds to 5%. With the
overall hedge limit being capped at 10%, an allocator could splitfund
their allocation to hedge across four different funds equally.
This has not been possible up until now as no-one could find
the door to a LISP with a selection of approved hedge funds
available. This is changing as several LISPs are seeing the demand
for hedge funds, allocating the research time, and adding their
preferred funds to their platforms. If you are interested in adding
a great diversifier to your portfolios, offering equity-like net returns
at lower volatility or elevated returns at market-like volatility, then
please contact your preferred LISP consultants to motivate for
hedge funds to be added to their platforms.