New mar­ket for in­dus­try

Strict reg­u­la­tions and a con­ser­va­tive ap­proach should help al­lay in­vestors’ fears

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

Gover­nance, over­sight and risk man­age­ment are key words SA’s hedge fund in­dus­try are em­pha­sis­ing as it con­sid­ers its prospects in the light of new reg­u­la­tions that al­low it to en­ter the re­tail in­vest­ment space.

Hedge funds are rel­a­tively new in SA, hav­ing first ap­peared in 2002 with the fund man­agers re­stricted to a niche mar­ket made up of in­sti­tu­tional and high net-worth in­vestors. Fol­low­ing re­clas­si­fi­ca­tion un­der the Col­lec­tive In­vest­ment Schemes Con­trol Act (Cisca), they are keen to ap­ply their ex­per­tise in the broader mar­ket.

“When the cur­rent Cisca was drawn up in the 1990s it was al­ready en­vis­aged that hedge funds would fall un­der the act,” says Ian Hamil­ton, MD of IDS. “There is a need for in­vestors to have a wider choice of in­vest­ments that can of­fer diversity in port­fo­lios.”

Since the change was made last year, the Fi­nan­cial Ser­vices Board says, it has re­ceived ap­pli­ca­tions from 21 man­age­ment com­pa­nies rep­re­sent­ing 24 qual­i­fied in­vestor schemes and 10 re­tail hedge fund schemes. Thus far, 12 man­age­ment com­pa­nies rep­re­sent­ing 14 qual­i­fied funds and seven re­tail schemes have been ap­proved.

Mak­ing the tran­si­tion to the new en­vi­ron­ment re­quires the im­ple­men­ta­tion of rig­or­ous con­trols to pro­tect in­vestors who, for the most part, may be un­fa­mil­iar with the strate­gies or risks that are in­volved.

One of the re­quire­ments, which is in line with the ap­proach taken in Europe, is that a fund man­ager can­not also be the ad­min­is­tra­tor of a fund.

This is a space oc­cu­pied by IDS, which has es­tab­lished IDS Manco to of­fer a plat­form through which fund man­agers gain ac­cess to the op­er­a­tional in­fras­truc­ture that al­lows them to fo­cus on do­ing what they do best — man­ag­ing funds.

As the nom­i­nated man­age­ment com­pany, IDS is re­spon­si­ble for the proper man­age­ment of the funds. With this comes the risk if the funds are not prop­erly man­aged, which height­ens its fo­cus on risk man­age­ment.

Th­ese are im­por­tant con­sid­er­a­tions for in­vestors who are think­ing of di­ver­si­fi­ca­tion of their port­fo­lios out of tra­di­tional as­set classes. De­spite this attraction, the in­dus­try may ini­tially have to over­come neg­a­tive con­no­ta­tions as a re­sult of spec­tac­u­lar hedge fund blowouts in­ter­na­tion­ally.

“There are def­i­nitely mis­con­cep­tions about hedge funds, es­pe­cially those based in off­shore mar­kets,” says Eu­gene Vis­agie, head of hedge fund in­vest­ments, No­vare.

“In SA, it is a con­ser­va­tive mar­ket be­cause the bulk of as­sets have been from the in­sti­tu­tional mar­ket, which is fo­cused more on cap­i­tal preser­va­tion.

“There is, how­ever, a very well-ed­u­cated fi­nan­cial mar­ket lo­cally that is in­ter­ested in the hedge fund space.

“Th­ese funds are also very well reg­u­lated and of­fer an or­gan­ised in­vest­ment style.”

Anchor Cap­i­tal’s head of al­ter­na­tive in­vest­ments, Glen Baker, is equally up­beat about the in­dus­try’s prospects once ed­u­ca­tion and com­fort lev­els rise as more of th­ese re­tail hedge funds come to mar­ket.

“The new reg­u­la­tions form a huge layer of trans­parency and pro­tec­tion that was pre­vi­ously un­avail­able be­cause they weren’t reg­u­lated. The risk man­age­ment ser­vices the ad­min­is­tra­tor pro­vides are very im­por­tant to the pro­tec­tion of as­sets,” he says. “The neg­a­tive press that hedge funds get is of­ten be­cause of fraud. Oc­ca­sion­ally funds have un­der­per­formed be­cause of poor in­vest­ments, but this ap­plies to all funds across the world, not only to hedge funds.”

The tight reg­u­la­tions,

The in­dus­try may ini­tially have to over­come neg­a­tive con­no­ta­tions as a re­sult of spec­tac­u­lar hedge fund blowouts in­ter­na­tion­ally

com­bined with a gen­er­ally con­ser­va­tive, cap­i­tal-preser­va­tion in­vest­ment ap­proach by hedge fund man­agers to date, should go some way to­wards al­lay­ing in­vestors’ fears.

With the clas­si­fi­ca­tion of th­ese funds as col­lec­tive in­vest­ment schemes, in­vestors now also have greater clar­ity on the tax im­pli­ca­tions from in­vest­ing in th­ese funds.

In­vest­ments of three years or longer will be sub­ject to cap­i­tal gains as op­posed to in­come tax, which Hamil­ton says could also spur pen­sion money to flow into th­ese funds. He says the re­tire­ment in­dus­try, while now the big­gest in­vestor in hedge funds, has been cau­tious given the tax uncertaint­y. The reg­u­lated na­ture of the funds will also go some way to­wards di­min­ish­ing pre­vi­ous con­cerns.

The ques­tion is how th­ese spe­cial­ist hedge fund man­agers will adapt now that they have a far broader ad­dress­able mar­ket.

Alexia Kobusch, MD of Nau­tilus MAP, be­lieves some ad­just­ment may be needed for the hedge funds that in­tend en­ter­ing the mar­ket di­rectly.

“In the re­tail space, in­vestors place a lot of trust in their fi­nan­cial ad­vis­ers while in the qual­i­fied space they of­ten meet the man­ager run­ning their money face to face. So there is a far greater em­pha­sis on demon­strat­ing cred­i­bil­ity and in­tegrity. It will be in­ter­est­ing if new fund man­agers come into the mar­ket that have not ex­pe­ri­enced that.”

As for ex­pect­ing greater competitio­n from tra­di­tional fund man­agers mak­ing a play on the re­tail hedge fund space, she is more scep­ti­cal.

“To put this into per­spec­tive, there is R1.2 tril­lion in­vested in unit trusts and R60bn in hedge funds. Un­less man­agers in the tra­di­tional space feel it is fi­nan­cially worth­while to fo­cus on the re­tail hedge fund space we are prob­a­bly not go­ing to see a tran­si­tion.

“It may seem ap­peal­ing to move into the hedge fund space be­cause it ap­pears ‘sex­ier’, so an el­e­ment of ego may come into it, but it is a dif­fi­cult tran­si­tion to make,” she says.

Eu­gene Vis­agie … there are mis­con­cep­tions about hedge funds

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