SA investors have more appetite for alternative investments
The massive growth in hedge fund industry assets in 2022 suggests that local investors are increasingly accepting these funds as an important investment tool in mitigating market volatility. By
South Africans are becoming more comfortable with “alternative investments”, as borne out by an unprecedented 30% growth in hedge fund industry assets last year.
The industry ended 2022 with R113.01billion under management, compared with R86.93-billion at the end of 2021.
The hedge fund industry attracted healthy net inflows of R5.33-billion in 2022, as opposed to net outflows of R2.45-billion in 2020, according to the Association for Savings and Investment South Africa (Asisa).
Hayden Reinders, convenor of the Asisa Hedge Funds Standing Committee, says the industry has had to endure several lean years after the implementation of crucial reform initiatives, which resulted in comprehensive regulation and the consolidation and closure of funds, stabilising at 216 hedge funds.
In 2015, South Africa became the first country in the world to implement comprehensive regulation for two categories of hedge funds. Qualified hedge funds are aimed at investors with a solid understanding of hedge funds, with a minimum investment of R1-million.
Retail hedge funds are open to all investors and the average minimum lump sum investment is R50,000.
“Seeing strong growth numbers for the industry is a welcome development and hopefully indicates that hedge funds in South Africa are increasingly being accepted as an important investment tool in mitigating market volatility,” Reinders says.
Amendments to Regulation 28 of the Pension Funds Act are expected to lead to more growth this year, he adds.
The amendments separate hedge funds and private equity investments, allowing local pension funds to invest 10% of assets in hedge funds and 15% in private equity investments.
“The amendments enable hedge funds to operate on a more level playing field, which should result in stronger inflows.
“Most pension funds are nowhere near the 10% maximum, which means there is plenty of room for growth.”
Retail hedge funds held 37% of assets under management at the end of December 2022, according to Reinders, while qualified investor hedge funds held 63% of assets.
The net inflows in 2022 were driven mainly by retail hedge funds, which attracted net inflows of just over R4-billion, whereas qualified investor hedge funds recorded net inflows of just over R1-billion.
Private debt
Private debt is another alternative asset class seeing huge growth in South Africa. These instruments offer lower volatility, lower listed market correlation and better cash returns relative to those provided by traditional asset classes such as equities, fixed income and bonds.
Also known as direct lending, private debt is a fixed-income alternative investment that is basically a loan from a non-bank lender. Non-bank lenders provide private loans for various purposes, such as to bridge property transactions, develop real estate, finance business growth, provide working capital and fund infrastructure.
These loans generally have shorter repayment periods.
Dino Zuccollo, the head of product development and distribution at Westbrooke Alternative Asset Management, says private debt investors enjoy the following benefits:
• Higher returns than traditional fixedincome investments, such as bonds.
• Lower volatility than publicly traded investments, as the private market nature of the assets removes mark-tomarket swings inherent in the listed markets.
• Potentially lower risk, as the investments typically benefit from hard asset security and (when managed by an experienced investment manager) are made to companies with stable cash flows and solid fundamentals.
• Portfolio diversification, as the investment risk profiles generally differ from those provided through traditional listed access points.
• Predictable cash flows, as the borrower typically pays set interest amounts and principal on a regular basis.
• Potential tax efficiency owing to the ability for enhanced investment structuring.
The latest Westbrooke Alternative Asset Management Investing in Alternatives Wealth Partner Survey shows that private debt, structured products and hedge funds are the top three alternative investments for sophisticated South African investors.
Zuccollo says 61% of respondents indicated that they planned to increase their allocations to alternatives, allocating up to 20% of their portfolios to these investments, whereas 55% focused 60% or more of their alternative investment allocation on offshore markets.
Private debt also allows local investors to access opportunities in markets that are otherwise inaccessible to South African investors, such as the UK.
However, Zuccollo warns that investors should look for an experienced manager with a track record of success, as alternatives are complex, may be opaque and difficult to implement, and may be invested in a foreign geography with vastly different risk profiles.
In 2015, South Africa became the first country in the world to implement comprehensive regulation for two categories
of hedge funds