Overcoming re­sis­tance

SA hedge funds dif­fer from those in the US, for ex­am­ple, which has been rocked by scan­dals, writes Jo­hann Barnard

Financial Mail - Investors Monthly - - Feature: Hedge Funds -

Along road lies ahead for the hedge fund in­dus­try as it adapts to a new ex­is­tence in the reg­u­lated col­lec­tive in­vest­ment scheme (CIS) space.

In the past 18 months con­sid­er­able time and re­sources have been spent on com­plet­ing the con­ver­sion of port­fo­lios to com­ply with Fi­nan­cial Ser­vices Board reg­u­la­tions, and in­dus­try at­ten­tion is now be­ing turned to win­ning re­tail clients.

The big­gest chal­lenge to at­tract­ing new in­flows is the com­par­a­tively un­known na­ture and ben­e­fits of hedge funds in the re­tail space.

It is only nat­u­ral that the ab­sence of fa­mil­iar­ity with this as­set class will con­trib­ute to some ap­pre­hen­sion.

The in­dus­try there­fore ap­pre­ci­ates that it needs to do some se­ri­ous work to over­come in­vestor ner­vous­ness.

A start­ing point to­ward achiev­ing that is to gain the con­fi­dence of in­de­pen­dent fi­nan­cial ad­vis­ers and get­ting funds ac­cepted onto CIS plat­forms by Linked In­vest­ment Ser­vices Providers (Lisps).

“With ap­pro­pri­ate fi­nan­cial ad­vice, adding a hedge fund com­po­nent to an over­all port­fo­lio as an as­set al­lo­ca­tion strat­egy makes a lot of sense. But I still be­lieve there needs to be more ed­u­ca­tion to the re­tail space on how hedge funds should form part of a port­fo­lio,” says Cor­nelis Bat­ten, CEO of RealFin Col­lec­tive In­vest­ments.

The mes­sage the in­dus­try has been con­sis­tent in com­mu­ni­cat­ing is that the na­ture and rep­u­ta­tion of lo­cal hedge funds are sig­nif­i­cantly dif­fer­ent from mar­kets such as the US, which has been rocked by its fair share of hedge fund scan­dals.

Bat­ten says that lo­cal funds are far more con­ser­va­tive gen­er­ally, but par­tic­u­larly with re­gard to the reg­u­lated re­tail funds. Funds that em­ploy lever­age, for ex­am­ple, are re­stricted to ex­po­sure of a max­i­mum of 200% us­ing the com­mit­ment ap­proach.

“The work we as a [man­age­ment com­mit­tee] do in re­port­ing to the Fi­nan­cial Ser­vices Board on the re­tail funds is a lot more ar­du­ous than for qual­i­fied funds. So there is ben­e­fit for the re­tail in­vestor,” he says. “And even for the non­re­tail in­vestor. The mid- to small-tier pen­sion funds would prob­a­bly grav­i­tate more to­ward the re­tail space de­spite be­ing able to come into a qual­i­fied fund, be­cause there is higher reg­u­la­tory over­sight.”

The mo­ti­va­tion for the in­dus­try to win over the con­fi­dence of ad­vis­ers, CIS providers and in­di­vid­u­als is ob­vi­ous: the un­tapped re­tail mar­ket presents tremen­dous growth op­por­tu­ni­ties. How­ever, though the po­ten­tial is great, it is un­likely to match the more than R2 tril­lion that is in­vested in unit trusts. But the longer the in­dus­try waits, the slower the up­take will be.

Graeme Rate, head of hedge funds at Sanne Group, which pro­vides man­age­ment ser­vices to the in­dus­try, says the pace of up­take is go­ing to be driven by the broader un­der­stand­ing by re­tail in­vestors of the ben­e­fits of hedge fund prod­ucts.

“Lisps have been say­ing we are an un­known at the mo­ment.

“So there is an obli­ga­tion for the hedge fund in­dus­try to ed­u­cate mem­bers of the pub­lic about why hedge should be part of their as­set al­lo­ca­tion.

“We also need to spend time with the pen­sion funds and their trustees and get them to un­der­stand what we’re do­ing in the reg­u­lated space,” he says.

Ini­tial dis­cus­sions with in­vestor-fac­ing play­ers like the Lisps have been fruit­ful, though it is far from a given that hedge funds will be a nat­u­ral choice — cer­tainly at this early stage of be­ing avail­able in the mar­ket. Rate says play­ers such as the Lisps have also made it clear that it re­mains the re­spon­si­bil­ity of the hedge fund in­dus­try to drive de­mand for the prod­ucts. “So we must en­sure the IFAs un­der­stand the ben­e­fits of hedge funds,” he says.

“If you speak to the man in the street about a hedge fund prod­uct, risk and cost are the two most com­monly iden­ti­fied as­pects,” Rate says. Such pre­con­ceived ideas must be “ar­gued away,” he says.

The need to make a con­vinc­ing ar­gu­ment to at­tract broader re­tail money is not un­ex­pected

All the in­dus­try par­tic­i­pants in­ter­viewed ad­mit­ted that in­flows thus far have been muted, but that this was ex­pected given the low lev­els of aware­ness and con­fi­dence about this new in­vest­ment op­por­tu­nity.

Alexia Kobusch, MD of Nau­tilus, cau­tions that fund man­agers are po­ten­tially at risk of los­ing their ad­van­tage if they sud­denly change tac­tics or strate­gies to at­tract in­come from this new pool of money.

“Each port­fo­lio man­ager has his or her own style. As soon some­one who has ex­celled in the past us­ing a cer­tain strat­egy changes the way he or she be­haves to fit into some­thing dif­fer­ent, re­turns do suf­fer quite sig­nif­i­cantly,” she says.

Pic­ture: iS­TOCK

Cor­nelis Bat­ten … ed­u­ca­tion is needed

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