SA hedge funds differ from those in the US, for example, which has been rocked by scandals, writes Johann Barnard
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.
Cornelis Batten … education is needed