Hedge funds must be for all

BAR­RI­ERS: REG­U­LA­TIONS LIMIT AC­CESS

The Citizen (KZN) - - Business - Wil­helm Land­man Li­cence dilemma

There seems to be no one can­vass­ing on be­half of hedge funds in South Africa.

Hedge funds can of­fer ex­cep­tional re­turns for in­creas­ingly min­i­mal risk, but the way it stands now, the leg­is­la­tion makes it dif­fi­cult – if not im­pos­si­ble – for ad­vi­sors to give ad­vice with re­spect to hedge funds or place their clients’ money into a hedge fund.

In the past, all hedge funds were un­reg­u­lated – they could not be mar­keted to the gen­eral pub­lic and only in­sti­tu­tional in­vestors had ac­cess to them.

(The funds them­selves might not have been reg­u­lated, but as­set man­agers who op­er­ated in the hedge fund space were re­quired to hold a spe­cial cat­e­gory of li­cence un­der the Fi­nan­cial Ad­vi­sory and In­ter­me­di­ary Ser­vices [Fais] Act).

In 2015, how­ever, hedge funds were de­clared to be a col­lec­tive in­vest­ment scheme, and as such they were drawn within the am­bit of the Col­lec­tive In­vest­ment Schemes Con­trol Act (Cisca), be­com­ing reg­u­lated fi­nan­cial prod­ucts for the first time.

The new leg­is­la­tion clas­si­fied hedge funds into two cat­e­gories: qual­i­fied in­vestor hedge funds and re­tail hedge funds.

Hedge fund man­agers had been clam­our­ing for the lat­ter cat­e­gory for years, and one would have thought that the abil­ity to mar­ket hedge funds to the gen­eral pub­lic in South Africa would have been an an­swer to their prayers.

In prac­tice, how­ever, this has not played out as ex­pected.

The first prob­lem con­cerns the re­la­tion­ship be­tween hedge funds and funds of funds. A fund of funds is of­ten the in­vest­ment ve­hi­cle of choice for an ad­vi­sor, but when the hedge fund leg­is­la­tion was up­dated, it wasn’t up­dated for funds of funds, and a fund of funds is there­fore pro­hib­ited from in­vest­ing in a hedge fund. This blocks at least one channel for re­tail in­vestors.

Another pop­u­lar op­tion for an ad­vi­sor is to in­vest a client’s money via a linked in­vest­ment ser­vice provider (Lisp) plat­form, such as Mo­men­tum, Al­lan Gray, San­lam Glacier or sim­i­lar.

There are prob­lems for re­tail hedge funds on such plat­forms too. Only Mo­men­tum has thus far given the green light to sin­gle-man­ager hedge funds. But in­vestors need to sign an ad­di­tional risk-dis­clo­sure doc­u­ment, which im­me­di­ately raises an un­war­ranted alarm.

The headache gets worse: de­spite the al­ready slim pick­ings on Lisp plat­forms, an ad­vi­sor is only al­lowed to place a client’s money in a hedge fund if that ad­vi­sor is ap­pro­pri­ately au­tho­rised to do so in terms of their Cat­e­gory 1 Fais li­cence.

Prac­ti­cally, how­ever, very few ad­vi­sors have worked in the hedge fund space and have the nec­es­sary ex­pe­ri­ence – and gain­ing such ex­pe­ri­ence after the fact is an oner­ous process. As a re­sult, hardly any ad­vi­sors in South Africa are au­tho­rised to ren­der hedge fund ser­vices and pro­vide ad­vice in re­spect of hedge funds.

It’s mad­ness. The mar­ket­ing of re­tail hedge funds might be per­mit­ted by the leg­is­la­tion, but it means noth­ing if ad­vi­sors are not per­mit­ted to do so, es­pe­cially con­sid­er­ing the bar­ri­ers to en­try pre­sented by funds of funds and Lisp plat­forms, and there seems to be no one can­vass­ing on be­half of hedge funds in South Africa.

Ul­ti­mately, the dis­course sur­round­ing hedge funds needs to change. Hedge funds are no longer the mav­er­ick in­vest­ment prod­ucts they once were; they’re sim­ply a dif­fer­ent as­set class that should be avail­able to ev­ery­one.

Wil­helm Land­man is a di­rec­tor at AIP Cap­i­tal Man­age­ment

Pic­ture: Shut­ter­stock

OPEN THE DOOR. Hedge funds are no longer mav­er­ick in­vest­ment prod­ucts; they’re sim­ply a dif­fer­ent as­set class that should be avail­able to ev­ery­one.

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