Next evolution for hedge funds

South Africa’s hedge fund industry is betting on new rules to help reverse a record drop in assets under management.

New guidelines from January, will split funds into different investment categories and geographical exposure, so local investors can make better comparisons. They will also allow hedge funds to be stacked against long-only equity or fixed-income funds and help the industry body compile uniform data.

“This is the next evolution of where we are going,” said Hayden Reinders, chair of the Association for Savings and Investment South Africa’s hedge funds standing committee. “We want to create awareness that a hedge fund is a different type of fund that can fit into different types of portfolios.”

SA hedge funds are facing more competition from passive funds, while meagre returns have intensified scrutiny on fees. Still, with only 2% of the country’s $150 billion (R2 226 billion) in savings in alternative assets, the industry is counting on greater transparency and efforts to further open who can invest in the funds.

“Globally, if you look at the allocation of alternatives compared to more traditional funds, alternatives can account for as much as 8% of the total,” said Reinders, who is also head of business development at Prescient Fund Services. “Conservatively in SA, the industry could look to double.”

The industry is dominated by a few managers, with 10 of the largest funds overseeing 60% of assets, according to the Novare Hedge Fund survey. Companies like 36ONE Asset Management and Fairtree Asset Management run some of the biggest funds.

Total assets under management fell for a second year in 2018, plunging 25% to R47.1 billion.

“Hedge funds over the last three to five years have had a torrid time”, even though many outperformed traditional asset classes, said Jean Pierre Verster, chief executive of Protea Capital Management. His Protea SA Retail Hedge Fund returned a market-beating 24% last year, after deducting a 6% performance fee.

“Now that hedge funds must formally report net performance, it isn’t this ‘fuzzy area’ anymore” and critics will no longer be able to argue hedge-fund managers are “cherry picking” to show off their best performers, he said.

Rules alone cannot drive growth, said Citadel Wealth Management’s George Herman.

“Improving risk management and transparency, a greater focus on aligning manager and investor interests and lowering fee structures” are among the most important trends that will shape the landscape. – Bloomberg