A misunderstood asset class
Hedge funds have not been met with the same enthusiasm in the South African market as on the international scene. Newly passed amendments to the Collective Investment Schemes Control Act could either see them boom or shrink in number.
Hedge funds have been a popular investment vehicle on the international market in recent years, and proponents have hailed them as a rational alternative to the actively managed long-only fund. While many say that hedge funds expose investors to significantly lower risk, a lack of clear regulation in the South African market has kept their numbers low. Hedge funds are private investment funds that tend to market themselves exclusively to wealthy investors. Because the middle and lower class investors are generally not allowed to invest in hedge funds due to financial limits, regulators across the globe have historically allowed these funds to operate with significantly less oversight. South Africa is no exception in this regard, but a number of other regulations in the country’s financial sector have additionally made hedge funds extremely difficult to market to any class of investor at all. Hence, to become an investor in a hedge fund, one would need to know the right people first. These investment vehicles have historically been marketed with the idea investors would be protected from downturns in the market, while seeing above average returns in better times. That definition no longer applies, and hedge funds are now better understood as aggressive risk seeking funds that typically use leverage to magnify returns. Since these funds operate with somewhat more freedom, they employ various strategies to maximise profit, and target many markets. Global, macro and directional hedge funds typically receive the most attention, as they often make substantial bets on individual securities or sectors. While there is a hedge fund strategy for just about every flavour of investor out there, one common strategy for the vast majority is to make use of both long and short-term investments. WhereWhe long-term investment is the straightforwardstrai buying of stock with the potentialpote to gain value over time, short-term investinginve sees the fund manager ‘ borrowing’ stocksstoc that are likely to rapidly lose value, fromf another investor.