Vast growth opportunities ahead for South African hedge fund managers

The event was sponsored by IDS Fund Services and took place at the end of 2014 at the IDS’ Cape Town office.

As per the Editor:

The South African hedge fund industry can compete very well internationally. When overseas investors take a deeper look at the returns, there is almost every time this element of surprise when they see the extent and the persistence of alpha generation in the South African market vis-à-vis global hedge fund managers.

The South African equity market as a percentage of GDP is running at about 250%. This is unique across the globe – in emerging as well as developed markets there are very few markets that look like that. Because this very deep, very liquid equity market is dominated by long only fund managers, that on its own creates opportunity for hedge fund managers at the periphery extracting alpha from the opportunity set. Local South African institutions and high net worth investors have constantly increased their investments in local hedge funds over the past two years.

All current South African hedge funds will fall under the Collective Investment Schemes Control Act (CISCA) and become qualified investor funds (QIFs) once the draft regulations become effective, and the funds are declared as falling under CISCA by the Minister of Finance. It is envisaged that this should happen by 1 April 2015. Fund managers can then also change a QIF into a retail fund or launch new Retail Investor Hedge Funds (RIHF) and freely solicit from the public. A South African RIHF is similar to a UCITS product where the managers have a narrower mandate, although possibly a bit broader than what the current UCITS framework allows. Already now, investment advisers and wealth managers have expressed an interest to invest into this new breed of hedge funds, and are willing to be educated about the strategies and opportunities hedge funds offer.

The development and growth of the South African Unit Trust industry, operating within a well regulated environment has been significant. The CISCA regulations offered collective investment schemes significant opportunities to distribute, solicit, and develop new funds for the public. Industry insiders therefore see substantial similar growth opportunities for South African hedge fund managers once they operate under CISCA and have similar opportunities to solicit and distribute their funds.

The group discussed:

  1. Why there is still some upside in equity markets with long-only beta opportunities
  2. Bumper harvests provide opportunities in soft commodities, as does the collapse of oil prices in certain sectors in Africa
  3. QE has so far been sufficient to support equities, but insufficient to create inflation and turn the metals bullish nor the bond markets bearish. How far will QE continue?
  4. What’s the best way to tax derivatives? And in general, does turnover in a portfolio represent the justification for different tax treatment, or is it the behaviour and the intent of the unit holder, the investor?
  5. Why the high net worth market will be a key driver going forward, especially to fund smaller and new managers
  6. What are the best vehicles and strategies to participate in the Africa story?

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