South Africa’s Hedge Fund Market Has Successfully Weathered The Pandemic Storm
It is the third time that independent statistics have been compiled on the growth of South Africa’s hedge funds industry by ASISA – the Association for Savings and Investment in South Africa. Previously numbers were reported by individual product providers, but the figures demonstrate that the industry is firmly shrugging off the pandemic and moving ahead. They shed valuable light on what sort of strategies are selling in South Africa and where they are selling.
They also demonstrate that the domestic hedge funds market is growing even with the impact of the pandemic and is becoming more transparent.
According to ASISA, assets under management from South Africa’s hedge funds were up by ZAR 4.35bn (USD $290mn) in 2020, taking them to ZAR 73.27bn (USD $4.97bn). The AuM levels grew despite net (marginal) outflows during the period, also reflecting broader recovery in the South African stock market and the wider economy.
ASISA has been keen to make hedge fund data more accessible and more meaningful, especially for the expanding local wealth management industry, which is seen as a key distribution outlet for both local South African hedge funds, and also larger overseas fund managers seeking to access the South African market.
ASISA has introduced a Hedge Funds Classification Standard which breaks the existing local hedge funds universe down into easily identifiable silos, to facilitate fund selection by advisors and is consistent with the Classification Standards used for the Traditional Funds in South Africa.
Hedge funds in South Africa currently fall into two categories, the result of regulations introduced in 2015. Qualified Investor Hedge Funds have a minimum investment level of ZAR 1 million and investors must be able to demonstrate their credentials as experienced market participants. The Retail Hedge Funds classification allows for wider access to the investor market, but brings with it stricter regulatory controls. Retail funds cater to investors who can afford the average minimum ZAR 50,000 per annum lump sum to hedge funds.
Equity long/short remains the most popular hedge fund strategy in South Africa, accounting for 52.7% of retail fund assets in 2020, and 53.2% of qualified funds’ AuM. Interestingly, Fixed Income funds account for another third of the retail hedge funds universe, but only 7% of qualified funds.
“The process of transitioning to either a qualified investor hedge fund structure or a retail hedge fund structure had led to a number of hedge fund managers drastically consolidating their product offering,” explained Hayden Reinders, Head of Business Development at Prescient Fund Services and convenor of the ASISA Hedge Funds Standing Committee. “This has led to the drop in terms of the total number of regulated hedge fund products by the end of December 2021.”
It is interesting to note that during the period of calendar 2021 it was retail money which was really providing the net inflows to South African hedge funds. This can be attributed in part to the greater reach of hedge funds within the local wealth management networks, and this is the area which holds the potential for further growth in assets over the shorter term picture for fund managers.
Overall the South African asset management industry demonstrated strong capacity for growth in 2020 and 2021, despite the pandemic, and against trend. While retail investors were driving hedge fund AuM, in the long only sector it was institutions, which accounted for 60% of AuM. Much of the latter came in from the insurance sector, contributing 15% of the asset growth in 2019-20, according to Boston Consulting Group.
But hedge funds will be looking to the country’s buoyant high net worth sector to provide the real growth. Volumes of HNWIs in South Africa continue to grow and it plays home to over twice as many as any other country on the African continent. The number of HNWIs resident – not all of them locals – is forecast to grow to 56,000 by 2027. Almost half of the private wealth managed in South Africa is from the HNWI market. This will make it an increasingly attractive destination for overseas hedge funds and other asset managers looking to build investor relationships in this market.
Stuart Fieldhouse is a Director of Hawksmoor Partners
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