Consolidation seen in SA hedge fund industry

Current funds have R72 billion in available capacity.

Since the financial crisis in 2008 there has been consolidation at a steady pace in the South African hedge fund industry, with the concentration of hedge fund assets managed by the larger managers increasing.

Referring to the Novare Investments South African Hedge Fund Survey for 2013, Carla de Waal, Head of Alternative Investment Solutions at Novare Investments said: “This year again recorded that several hedge fund managers joined larger more established managers, even though they still managed the same mandates. The consolidation observed over recent years may also be the result of regulatory requirements in South Africa for obtaining and maintaining an appropriate license as a Hedge Fund FSP under FAIS.

“Consolidation is evident from the concentration of assets in companies managing hedge fund assets in excess of R2 billion. These companies now manage more than 68.2% of industry assets, compared to 46.7% a year ago.”

Companies with more than R2 billion in hedge fund assets also received 61.4% of new capital inflows during the year, continuing the trend that the larger companies tend to grow even larger.

Other meaningful changes in the concentration of assets included asset managers with hedge fund assets of between R1 billion and R2 billion dropping from 32.1% to 13.3% of industry assets, with asset managers managing less than R100 million down from 3.1% to 1.5%.

According to the Novare survey, inflows combined with performance during the 12 months to 30 June 2013 increased total industry assets to R42.2 billion – a new all-time high.

The 10 largest hedge funds managed R17.3 billion, or 42.9% of total industry assets and also received the bulk of new capital inflows. Over the past year, new capital inflows amounted to just over R5 billion. Seven of the 10 largest hedge funds were equity long/short funds, the strategy which also received the lion’s share of new inflows. Funds with an investment track record of more than eight years managed more than 50.0% of industry assets.

“All of the funds in the top 10 have track records exceeding four years; however eight of the top 10 funds boast a track record of more than seven years. Of the top 10 funds, eight are managed by boutique hedge fund managers with the other two managed within diversified asset management companies each managing assets exceeding R100 billion across their different investment products, which include long only products,” said de Waal.

Funds that housed 82.1% of industry assets as at 30 June 2013 were still open for new investments, while those managing 11.4% of assets were soft closed (only taking additional investments from current investors). Funds representing 6.5% of industry assets were hard-closed and not accepting any new inflows.

Participants with funds still open for investments indicated that they had an additional R72 billion of capacity available in their current funds, with just over half of this in the equity long/short strategy.

In terms of future growth, just over 41% of participants said regulatory change would lead to growth. A further 29.9% said expanding distribution channels could increase assets, while 10.3% indicated that customised client solutions would have a positive impact.

Funds of hedge funds were the largest allocator of capital to hedge funds, accounting for 63.0% of industry assets. Other investors were high net worth individuals, life funds, seeding and proprietary capital, and direct pension fund investments representing 5.0% of industry assets.