The most exclusive club is open, but where is the door?

By Mike Titley, Business Development Fund Manager

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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.

Michael Titley, Business Development Fund Manager, Laurium Capital

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 split-fund 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.