Latest Numbers Signal Upbeat Outlook for South Africa’s Hedge Funds Sector
Like many other areas of the financial services industry, South Africa’s alternative investments sector is emerging from post-pandemic malaise and starting to demonstrate some significant growth factors. This was reflected in recent numbers released to the media by ASISA – the Association of Savings and Investment South Africa.
The South African hedge fund industry grew its assets by a punchy 30% in 2023 with ZAR 5.33bn (USD 290m) of net inflows in 2022.
“It’s been a turbulent time for markets, but hedge funds have seen flows and have performed – this shows that investors appreciate their value,” says Hayden Reinders, convenor of the ASISA Hedge Funds Standing Committee. “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.”
Since 2015 South Africa has divided its hedge funds sector into Retail and Qualified segments, whereas previously everything sat under one regulatory designation. An industry that was worth around ZAR 64bn in 2018 has now scaled up considerably. In December 2021 it had some ZAR 87bn (USD 4.78bn) in AuM, but this has grown over the past year to exceed ZAR 113bn (USD 6.2bn).
This AuM figure is shared by a smaller club of South African hedge funds, with 216 now active, down from 245 before the pandemic. ASISA has tracked a strong pick up of net inflows to hedge funds in the course of the 12 months to the end of 2022.
Net flows have reversed since the end of 2020; the year 2020 was marked by considerable investor redemptions out of fixed income hedge funds, potentially because of the need by investors to access liquidity. Since then investors have piled back in, and 2022 was a bumper year for domestic hedge funds, with close to ZAR 2.2bn net inflows into long/short equity alone.
Within the retail market, one of the key developments has been the readiness of Linked Investment Service Providers – local collective investment platforms – to offer hedge funds out into the market. Some of the bigger local managers are also investing more into distribution and business development teams.
The market is still dominated by the qualified investor strategies offered to only sophisticated investors. We’ve not seen much of a shift here. In terms of retail classification, long/short equity funds remain the dominant strategy, with almost 60% of the market, followed by fixed income at 27.3%.
Within the Qualified Investor market in South Africa we saw a shift in strategy preference in the period, with multi-strategy funds emerging as the favoured sub-strategy – long/short equity relinquished its crown as the go to strategy for many professional investors. It now accounts for 45% of AuM against 49% for multi-strategy. This is partly thanks to more flexibility on mandate and liquidity terms.
“I’ve always felt there was a place for multi-strategy funds in this market,” Reinders said.
Changes in South Africa’s regulations have also made the hedge fund investing landscape clearer for investors. This includes daily pricing for a lot of local hedge funds which has helped to create a more level playing field from which investors can assess schemes.
ASISA anticipates and welcomes the indication of further changes to investment regulations in South Africa in 2023: a Draft Conduct Standard is underway which heralds changes to CISCA (Collective Investment Control Schemes Act 2002 – the umbrella legislation covering local collective investment schemes), including the regulated hedge fund.
Amendments to Regulation 28 of the country’s Pension Funds Act, which came into effect at the start of the year, separate hedge funds and private equity and allow local pension fund schemes to invest 10% of their assets into hedge funds, and 15% into private equity.
“The amendments enable hedge funds to operate on a more level playing field, which should result in strong inflows,” said Reinders.
Board Notice 90 is another item on the regulatory agenda which will determine what collective investment schemes can invest in. This is important for the sector, as it currently prohibits traditional funds from investing in hedge funds. Changes to this could also potentially be transformative for the industry in South Africa.
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