South Africa´s first retail hedge funds due early next year

Novare CIS has been granted regulatory approval to launch South Africa’s first retail hedge funds under the new legal dispensation introduced in February this year, resulting in hedge funds being regulated under the Collective Investments Schemes Control Act (CISCA) that encompasses unit trusts.

“With the Financial Services Board (FSB) having indicated its satisfaction with our offering, we intend to launch our retail hedge funds early next year,” said Rene Miles, Managing Director of Novare Collective Investments Schemes (CIS) – a management company offering traditional unit trusts, retail retirement vehicles and post-retirement solutions.

Novare CIS also applied for regulatory approval of a number of hedge fund portfolios managed by a range of boutique hedge fund managers including Matrix Fund Managers, Mazi Capital, Corion Capital, Tower Capital Management and Novare Investments.

Although product regulation is only now coming into effect, hedge fund asset managers have been regulated under the Financial Advisory and Intermediary Services Act (FAIS) since October 2007 under a separate license category, CATIIA. Discretionary asset managers require a CATII licence.

Novare CIS will host both retail and qualified investor hedge funds. The former will be accessible to the general public, while qualified hedge funds will only be available to investors meeting certain requirements, or those making use of the services of a financial adviser.

Retail hedge funds, will operate under stricter regulations to ensure investor protection, while qualified investor hedge funds will be subject to a less strict but fitting regulation with a focus on reporting and monitoring potential systemic risk, as well as adequate disclosure to investors.
Miles said the regulation of hedge funds would assist in growing industry assets, while opening opportunities to provide alternative investment vehicles to retail investors.

“The two most important benefits of including hedge funds as an additional alternative asset class in an investment portfolio are capital protection and asset class diversification,” she said.

“South African hedge funds have been successful in protecting capital and minimising drawdowns, resulting in enhanced returns and lower risk in the overall portfolio. In terms of diversification, hedge funds respond differently to market conditions compared to traditional asset classes, resulting in a low correlation with other assets.”

Classifying hedge funds as collective investment schemes places their oversight and supervision under the jurisdiction of the FSB where the priorities are to protect investors while monitoring systemic risk. Funds are required to report to investors and the FSB, and to employ enhanced risk monitoring practices and independent trustee oversight.

According to the Novare South African Hedge Fund Survey 2015, assets under management by the hedge fund industry reached R62 billion on 30 June 2015, a 15.8% increase on the previous year. By comparison, the local collective investment schemes industry had total assets to R1.8 trillion

Of the R62 billion in South African hedge funds, 60.9% was invested in the equity long/short strategy, which for the 12 months to June this year enjoyed an average compound return of 14.7% against the 3.7% achieved by the FTSE/JSE All Share Index.