HOW work? DO HEDGE FUNDS

Fol­low­ing re­cent changes in leg­is­la­tion, hedge funds are now sub­ject to reg­u­la­tion in SA. This means that if you want to in­vest in a hedge fund, you have greater pro­tec­tion as an in­vestor. But what are hedge funds? Neesa Mood­ley re­ports

CityPress - - Tenders -

An­gela Co­standius, Deloitte’s Cape Town-based fi­nan­cial ser­vices au­dit man­ager, says one of the big­gest ef­fects of the new reg­u­la­tion will be that South African hedge funds, which have es­ti­mated com­bined as­sets un­der man­age­ment of R83 bil­lion, will now be re­quired to ap­point a man­age­ment com­pany to over­see op­er­a­tions, in ad­di­tion to their ad­min­is­tra­tion and as­set man­age­ment arms.

Col­lec­tive in­vest­ment schemes are re­quired by law to have an ad­min­is­tra­tor, as­set man­ager and man­age­ment com­pany. Hedge funds were tra­di­tion­ally di­vided into an ad­min­is­tra­tor and as­set man­ager, but have un­til Oc­to­ber 30 2016 to com­ply with new reg­u­la­tions, which, for one, re­quire the ap­point­ment of a man­age­ment com­pany.

Co­standius says another pos­i­tive as­pect of the new reg­u­la­tions is that in­di­vid­ual in­vestors will have ac­cess to a wider range of as­sets, such as larger lim­its of un­listed in­vest­ments, as well as so­phis­ti­cated trad­ing strate­gies such as short sell­ing. “At this stage, unit trust fund man­agers may not bor­row money to in­vest, nei­ther may they short the mar­ket.”

Lever­ag­ing, or bor­row­ing cer­tain in­stru­ments to trade them on fi­nan­cial mar­kets, can also be used by hedge funds to take po­si­tions in cer­tain as­sets with­out hav­ing to own them. This puts them in a rather unique po­si­tion in that they don’t have to pay se­cu­ri­ties trans­fer tax.

Short sell­ing in­volves sell­ing a se­cu­rity that the seller does not yet own at an agreed price, based on the be­lief that the price of that se­cu­rity will fall below the spec­i­fied price by the time the trans­ac­tion ac­tu­ally oc­curs. That al­lows the seller to pocket the dif­fer­ence and make a profit.

“Hedge funds have the ad­van­tage in that they have a greater ar­ray of trad­ing strate­gies avail­able to them in or­der to en­hance re­turns for their in­vestors,” says Co­standius.

“If they think a cer­tain as­set price is go­ing to de­cline, they can de­vise a strat­egy to try to profit from that, whereas all a unit trust port­fo­lio man­ager can re­ally do is sell out of that as­set.” Higher-risk in­vest­ment

“There is ob­vi­ously a bit more risk as­so­ci­ated with th­ese highly so­phis­ti­cated trad­ing strate­gies, but po­ten­tial re­turns are higher,” says Co­standius. “At the same time, hedge funds are able to be a lot more ag­ile.”

She says the per­cep­tion of hedge funds as op­er­a­tions run by in­vest­ment “cow­boys” is largely un­fair, as re­tail funds in par­tic­u­lar have strin­gent re­stric­tions on what their as­set man­agers can in­vest in, as well as lim­its on lever­ag­ing. Hedge fund man­agers are re­quired to be li­censed with the Fi­nan­cial Ser­vices Board and the risk within the funds is also closely mon­i­tored by the Col­lec­tive In­vest­ment Schemes Con­trol Act.

No­vare Col­lec­tive In­vest­ment Schemes re­cently launched South Africa’s first re­tail hedge funds, in­clud­ing the No­vare May­ibentsha Growth Re­tail fund of hedge funds, which is avail­able to in­di­vid­ual in­vestors.

Rene Miles, man­ag­ing di­rec­tor of No­vare Col­lec­tive In­vest­ment Schemes, says the two most im­por­tant ben­e­fits of in­clud­ing hedge funds as an ad­di­tional al­ter­na­tive as­set class in an in­vest­ment port­fo­lio are cap­i­tal pro­tec­tion and as­set­class di­ver­si­fi­ca­tion.

“South African hedge funds have been suc­cess­ful in pro­tect­ing cap­i­tal and min­imis­ing draw­downs, re­sult­ing in en­hanced re­turns and lower risk in the over­all port­fo­lio. In terms of di­ver­si­fi­ca­tion, hedge funds re­spond dif­fer­ently to mar­ket con­di­tions com­pared with tra­di­tional as­set classes, re­sult­ing in a low cor­re­la­tion with other as­sets,” she says.

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