New laws to help SA hedge funds tackle poor image
HEDGE funds in South Africa are counting on new regulations imposed by the government to help them win credibility with pension fund managers who oversee R2.5 trillion.
The rules enhance oversight of hedge funds by requiring a separate management company, administrator and trustees that check and balance each other.
Managers must report holdings each quarter to investors and the Financial Services Board. The move might shoot down the industry’s “cowboy image” and unlock more of the 1/10th of pension fund investments that could be allocated into hedge funds, industry insiders said.
Strategies
“That 10 percent can be a substantial amount of money given the assets under management in the pensions industry,” Udesh Naicker, the head of hedge fund regulation at the Financial Services Board, said on August 25. “The hedge fund industry will probably experience significant growth through pension fund allocations.”
Hedge funds sometimes use short-selling, borrowing and derivatives in addition to traditional stock picking. Some hedge fund investing strategies that took on risk by borrowing to fund bets on market directions had hurt the industry’s reputation, Philippa Owen, the chief operating officer of Tower Capital Management, said.
“These are generally the types of strategies that have been linked to a cowboy image globally and are unfortunately the ones that make the headlines when the bets go wrong,” she said.
Sharing the same rules as traditional funds on how they reported activity and sold themselves “will certainly help pension funds and other investors gain more confidence in hedge funds”, she said.
The attitude of South African hedge funds to increased regulation echoes the experience in the US where in 2011 funds embraced Securities and Exchange Commission supervision as investors sought regulated venues for their money in the wake of the financial crisis.
In South Africa, despite robust investment processes, asset segregation and infrastructure, “the industry has been tainted by perceptions of rogue traders, sub-standard infrastructure and the gunslinging cowboy caricature,” Bradley Anthony, the chief investment officer at Fairtree Capital in Cape Town, said.
“For this reason, the vast majority of South African hedge fund managers not only welcome the regulation, but have actively participated in the processes which contributed to its introduction.”
The regulations should also increase protection of investors against fraud in the continent’s most developed economy. The Relative Value Arbitrage Fund sold itself as a hedge fund in a R2.2 billion ponzi scheme with about 3 000 investors that collapsed in 2012. In July of that year, under investigation by authorities and unable to keep pace with customer withdrawals, Herman Pretorius, who ran the fund, killed his former business partner Julian Williams and shot himself.
“The South African regulator is far more rigorous in its licensing of hedge funds than in the US and UK,” Andre Steyn, the chief executive of Steyn Capital Management, said. Steyn,who worked on hedge funds in those countries, controls R2bn in hedge funds and R5bn in long-only funds.
Winning support
The new rules, which change hedge funds’ classification to what South Africa terms “collective investment schemes”, are already winning over some investors.
Liberty Life Insurance, which administers R220bn in corporate and individual retirement funds, would use hedge funds because the clarity and certainty of the new regulations made investors comfortable, Justin Roffey, the company’s head of portfolio construction, said.
Roffey said: “Hedge funds have a great place because of their natural tendency toward low volatility and they produce bond-like returns, so it means we have another way of creating a benefit.”
Liberty Life began trial investments in hedge funds using its balance sheet more than five years ago and will also start investing retirement funds it administers, a move Roffey predicts will be followed by industry peers.
Local hedge funds had about R62bn under management in 111 vehicles as of June 30, according to Novare Investments, a Cape Townbased investment adviser.
The country’s collective investment scheme industry managed assets of R1.8 trillion across 1 225 portfolios as of June 30, according to the Association for Savings and Investment South Africa.
It was too early to determine how much would flow across to hedge funds, said Eugene Visagie, a Novare spokesman, and Marilyn Ramplin, the director of the Hedge Fund Academy.
The local industry had followed a global trend of cutting fees from about 2 percent of assets under management plus 20 percent of profits, to 1 percent of assets and 20 percent of profits, Ramplin said.
While the new regulations might mean higher costs for funds, Tower Capital would not be increasing its fees, Owen said.
Fund management companies will have 12 months after their structure is approved by the regulator to implement the changes from the old regulation. – Bloomberg