Over the last 12 months, the South African hedge fund industry has gone from strength to strength and there is growth in almost all areas. Preqin’s Hedge Fund Analyst online service shows that since June 2014, the number of South Africa-based funds has increased from 104 to 124, while the total assets managed by South Africa-based hedge funds has increased from just over R41bn to around R66bn. In addition to the promising growth statistics, there are other catalysts set to help the South African hedge fund industry on its journey to maturity.
In 2012, South Africa’s National Treasury and the Financial Services Board proposed a new regulatory framework within the Collective Investment Schemes Control Act of 2002 (CISCA), with the purpose of regulating South Africa-based hedge funds. The new law states that all hedge funds will have to register as collective investment schemes by April 2016 and will be split into two categories: Qualified (Restricted) Hedge Funds and Retail Hedge Funds. Both types of funds will be required to follow tighter regulations. Although regulation is often viewed unfavourably within the hedge fund industry (58% of hedge fund managers surveyed for the 2015 Preqin Global Hedge Fund Report said regulation would change the industry for the worse in 2015), this new CISCA framework is expected to bring additional structure and transparency to the South African hedge fund landscape. The regulated, retail-focused funds can be viewed similarly to the UCITS structure in Europe, and their introduction is sure to open up the industry to further expansion.
South Africa-based funds outperformed in 2014, returning 10.10% compared to the 4.51% achieved by the Preqin All-Strategies Hedge Fund benchmark. This strong performance has not gone unnoticed by investors. Twelve months ago there were 91 foreign investors looking to invest in Africa; today there are 102 seeking exposure to the continent. Unsurprisingly, investors are most likely to encounter equity-focused hedge funds in South Africa; 53% of all hedge funds in the country use an equity-focused strategy. Relative value strategies make up around 21% of the total, with multi-strategy funds comprising 13%. Macro, credit and event driven strategies are much less favoured, making up the remaining 12% of funds.
The South African hedge fund industry is clearly heading in the right direction. The number of funds has increased in the last 12 months alongside aggregate assets under management. Investor appetite remains strong and is expected to increase in the future as the new CISCA amendment aims to improve transparency within the industry. Fund returns are also impressive, with South Africa-based funds outperforming all hedge funds last year in addition to 2015 (6.71% YTD return compared with 4.35%). Questions remain over the level of strategy diversification employed by South Africa-based hedge funds, but this is certainly an area to look out for during the rest of 2015 and beyond.