Hedge Funds Explained

Hedge Funds are not as popular in South Africa as compared to the western world. This is because of the gap in per capita between the two sections of the world. 

When using the American standards to measure the number of South Africans that qualify to invest in a hedge fund, there are only 44 605 individuals in South Africa who qualify to invest in South Africa whereas in the US 18.6 million people are eligible to invest in hedge funds. 

In the United States, to invest in a hedge fund, you need to have at least $1 million in net worth or have an annual income of $250,000.00 or more. In the case of South Africa, that will be only 44 605 people that qualify to invest in hedge funds.

With the two worlds being completely different, South African financial institutions have created a hedge fund market that is suitable for South African consumers. Hedge fund requirements in South Africa tend to be more relaxed than in the United States. 

Companies like Sanlam offer investment opportunities to South Africans from an investment of R500,000.00 with most financial institutions requiring a minimum investment of R1,000,000.00. 

What is a Hedge Fund?

A hedge fund is an alternative investment vehicle that pools funds together from different investors and employs different strategies to earn active returns for investors. Hedge funds trade in relatively liquid assets and use more complex trading methods, portfolio construction, and risk management techniques. 

Because of the aforementioned reasons, hedge funds tend not to be inclusive to everyone. Accessibility to hedge funds is mainly for accredited investors. Retail investors can also pool their money into a hedge fund, however, the minimum required investment for this type of investor is very low when compared to the minimum investment requirement of  Qualified Investors. 

The requirement for investors to be qualified investors for investments in a hedge fund is caused by the risks associated with hedge funds. Hedge funds are known to be very aggressive, and risky. The concepts of long and short selling are important as they form an integral part of a hedge fund. 

Are Hedge Funds Legal in South Africa?

Yes, hedge funds are legal in South Africa as they are governed by the Financial Sector Conduct Authority. FSCA is there to enhance the efficiency and integrity of the markets. Therefore, if you want to invest in one of the licensed hedge funds in South Africa you can do so knowing you are protected by law. 

Note that the regulation of hedge funds is broad and it deals with the legal structure of a hedge fund, registrations, risk management, transparency and disclosure, and more. It is to your advantage as an investor in a hedge fund to read and understand the regulations of a hedge fund. This information will help you in choosing a hedge fund that is best suited for you. 

What are the Categories of a hedge fund in South Africa?

There are two categories of hedge funds in South Africa and these were put in place in 2015 by the then Financial Services Board (FSB) now FSCA. The two categories of hedge funds include Qualified Investor Hedge Funds and Retail Hedge Funds. 

Qualified Investor Hedge Funds

These are hedge funds for high net individuals or natural persons. A qualified investor hedge fund should meet at least two of the following criteria:

1. The investor has carried out transactions of a significant size on securities markets at an average frequency of at least 10 per quarter over the previous four quarters,
2. minimum investment amount of R1 million per portfolio;
3. The investor or his authorised advisor works or has worked for at least one year in the financial sector in a professional capacity that requires knowledge of securities investment.

Retail Hedge Funds

Retail Hedge funds are closely monitored by the registrar who prescribes the types of assets that may or may not be included in the portfolio. This approach limits the level of leverage that is permitted. The funds are required to register in terms of the requirements of the registrar. 

Retail Hedge funds are available to retail investors and institutional investors at large. A minimum lump sum investment of R50,000.00 is required. 

How are hedge funds classified in South Africa?

Hedge funds in South Africa are classified based on their investment strategies. This classification makes compliance of the hedge funds easier. Investment strategies of hedge funds include:

• Long short equity hedge funds – are investment portfolios that generate returns from positions held in the equity market regardless of the strategy used. The strategy emphasis that you take long positions in the winners as collateral to finance short positions in the losers

Fixed Income Hedge Funds – are investment portfolios that invest in derivatives and instruments that are sensitive to movements in the interest rate market. 

Multi-Strategy Hedge Funds – involves investment strategy that not only relies on a single asset class to generate investment opportunities but looks to blend different investment strategies and asset classes over time with one asset class dominating the portfolio. 

How to register a Hedge Fund in South Africa?

Registration of a hedge fund can be done through the Financial Sector Conduct Authority (FSCA) in South Africa. The FSCA will need to ensure that applicants are eligible and meet proper requirements and conditions to run a hedge fund. If satisfied, the FSCA will issue the successful applicant with a license of registration. 

To register for a hedge fund in South Africa, you need to submit the following to the FSCA:

1. a description of the manager seeking registration as well as an organogram indicating the group structure and ownership of the company;
2. a current tax clearance certificate in respect of all of the proposed shareholders (direct and indirect) of the proposed manager;
3. full particulars of the collective investment scheme the manager proposes to carry on and the manner in which it proposes to carry on such scheme;
4. an indication of the manager’s existing and proposed client base and an indication of the target market;
5. a business plan on how the marketing of the proposed scheme will be done;
6. the business objectives of the proposed scheme including the intended strategies to achieve these objectives and the different phases of achieving such objectives;
7. Name of the proposed trustee for the hedge fund;
8. The pricing structure of the hedge fund;
9. Memorandum of incorporation of the manager of the fund;
10. the names and physical addresses of the chairperson, directors, and managing director of the manager together with their curriculum vitae;
11. the name of the proposed auditor;
12. name of the proposed prime broker and/or names of derivatives counterparties;
13. risk management program that contains procedures to ensure that all applicable risks pertaining to the hedge fund can be identified, monitored, and managed at all time

Conclusion

Hedge funds are a winning investment vehicle in South Africa. There are many hedge funds from reputable companies with a track record that one can invest in. Companies such as Sanlam, Laurium capital, or Anchor Capital are safe to shop for a hedge fund product in South Africa.