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South African Hedge Funds: Expanding their Horizons – June 2014

by Jack Ebbs

  • 10 Jun 2014
  • HF

The South African hedge fund industry has experienced growth in recent years, with data from Preqin’s Hedge Fund Analyst showing that total assets under management of hedge funds in South Africa are now over ZAR 41bn. Preqin data shows that these assets are invested in 104 hedge funds which are offered by 49 different management companies.

Long/short equity funds dominate the South African hedge fund industry, with 44% of all funds employing this strategy. In addition, long bias and equity market neutral strategies account for 9% and 10% of funds respectively, highlighting the fact that equity strategies are the most utilized across the South African hedge fund landscape. There is a strong focus on domestic investing; over 90% of the funds managed by South Africa-based fund managers primarily focus their investments within South Africa or in Africa as a whole. In contrast to the prominence of long/short equity strategies, there are very few funds with macro or event driven investment styles. This may point towards growth in African equities markets meaning that equity strategies exhibit the best returns at this point. As the economy matures it will be interesting to see if there are variations in the strategies being offered.

When looking at the domiciles of hedge funds based in South Africa, Preqin data shows that 64% of hedge funds are domiciled domestically in South Africa. This data points towards an industry which is geared towards the needs of their local investors. With South African pension funds now able to invest up to 10% of their total assets under management in hedge funds and Preqin data showing that there are 51 active fund of hedge funds managers based in South Africa, there is clearly a market for hedge funds to raise capital locally. However, 50% of South Africa-based funds launched since 2012 are domiciled outside of South Africa, suggesting that some managers are looking to raise capital globally. Data from Preqin’s Hedge Fund Investor Profiles shows that there are currently 91 investors based outside South Africa which have a preference for investing in the region.

South African hedge funds have recovered well since the 2008 financial crisis, with Preqin benchmark data showing five-year annualized returns of 15.55% for these funds. In addition, the South African hedge fund industry benchmark returned 18.14% in 2013 – significantly outperforming the 11.67% achieved by the overall hedge fund benchmark. With continued local growth coupled with the strong performance in the industry, global investors may begin to take notice and increase their appetite and exposure to South African hedge fund products.

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