The hedge fund industry in South Africa is among the most established in the emerging markets, and probably the world, we are one of the first countries to put in place comprehensive regulation for hedge funds. With a market riddled with investment professionals and entrepreneurs looking for a rewarding entrepreneurial endeavour, The Full Time Cool Guys unpack the exclusive and mysterious nature of hedge funds in South Africa, and give you the rundown of how to start your own hedge fund and how to invest in one.
The popularity of hedge funds in South Africa, since inception in 1995, has gained traction, but there is still room for significant growth; as of December 2015 the domestic hedge fund industry was worth an estimated R62.1 billion, compared to the domestic unit trust industry which is worth R1.7 trillion. With greater regulations control over the industry and it being recently open to retail investors, there will be more growth and new funds launched in the near future. The ultimate aim of hedge funds is to limit the amount of risk an investment is exposed to while providing returns that beat the market, with the aid of leverage mechanisms and strategies employed by hedge fund managers. How this is ultimately done is, unlike unit trusts, hedge funds enter long-buy and short-sell positions, whereas unit trusts only enter long-buy positions. With that said, an argument can be made that it is relatively easy to start a hedge fund. However, navigating around legal requirements is very challenging, so here’s a quick summary of the legal aspect of hedge funds.
Hedge funds fall under the Collective Investment Schemes Control Act and are regulated as collective investment schemes, like unit trusts, and can take the investment vehicle of either a collective investment scheme trust arrangement or a limited liability partnership. Determining which structure to form is dependent on a number of factors, and should be decided upon on a case by case analysis. The manager of the hedge fund must register as a manager of collective investment schemes in securities and be authorized to administer a hedge fund, and needs to comply with Category IIA license requirements of the FAIS Act before they can manage the fund.
Hedge funds are divided into two market segments, one for qualified investors (persons who invest a minimum of R1 Million and have an understanding of investments and risk) and another for retail investors (which doesn’t have a minimum investment amount and is open to the general public). It follows that retail hedge funds are more guarded and regulated as opposed to qualified investor hedge funds, because they are more geared towards attracting the general public.
Alternatively, should you not wish to start out a hedge fund from scratch, you can very well invest in one and add a bit of diversification to your investment portfolio. Investing in a hedge fund also allows you to have a risk management aspect to your portfolio – since we have established that hedge funds allow for you to enter short-sell positions, as opposed to typical investments that only enter long-buy positions. Besides, local hedge funds have provided some pretty damn good returns as of recently, ranging from about 20% to 40%. For instance, The Capricorn Performer Fund had a net gain (after fees had been deducted) of 38.14% last year, with newer funds such as Think Capital Growth Fund providing 21.96%, and Tower Aggressive Fund with a return of 46.91% last year.
In conclusion, whether you decide to start a hedge fund or invest in one, both endeavours should be explored after soughting out advice from professionals. This was only a means to introduce you to a badass opportunity to build a legacy.