The Financial Services Board (FSB) has given Novare Collective Investments the go-ahead to open the first two collective investment schemes for regulated hedge funds. Novare will launch 35 hedge fund portfolios, including 26 for individual investors, from a range of managers, including its own, next year.
Some of the 26 retail funds for individual investors are likely to open as soon as February 1 and will be available to investors with R50 000 or more to invest, Eugene Visagie, the head of hedge funds at Novare, says.
Novare will also launch nine qualified-investor hedge funds in a separate scheme. These are aimed at institutional investors, such as retirement funds, and sophisticated individual investors, or those with financial advisers, with more than R1 million to invest.
Hedge funds are currently unregulated – although their managers are required to hold an FSB licence – but from April next year, all hedge funds will need to be registered with the FSB and comply with the regulations under the Collective Investment Schemes Control Act (Cisca).
Novare will offer 10 hedge funds of funds (offering diversity across more than one hedge fund) and the single-manager funds will be managed by Matrix Fund Managers, Mazi Capital, Corion Capital and Tower Capital Management. They will cover all the major hedge fund strategies: equity long-short, fixed income and multi-strategy, Visagie says.
Novare’s Mayibentsha Moderate Fund of Funds has returned more than 12.5 percent a year, on average, over the 10 years to the end of October.
Boutique manager Mazi Capital also has two unit trust funds, one of which is the top South African equity fund over five years for the quarter to the end of September.
Mazi has a hedge fund that aims to earn returns regardless of whether the market is rising or falling. It can invest in a range of investments, including equities, bonds, derivatives and off-shore assets. This fund has returned an average 13.9 percent a year over five years to the end of September against 14.6 percent returned by the FTSE/JSE All Share Index, but with considerably lower volatility, Visagie says.
Corion and Tower also have South African unit trust funds, which are multi-asset funds.
The FSB says it has received and is considering a further 20 applications from management companies wanting to register collective investment schemes that will operate as hedge funds. These applications comprise 17 qualified hedge funds and 13 retail funds and represent more than R95 billion in assets under management, the FSB says.
Novare’s survey says there is R62 billion in hedge funds in South Africa, and Visagie says the FSB’s figures include assets in hedge funds of funds (that is, some investments are counted twice).
The hedge fund regulations under Cisca introduce greater protection for investors. Funds will have to have independent trustees and be subject to oversight from the FSB, and there are restrictions on the investment strategies.
Hedge funds will be required to report regularly to investors and the FSB, which will monitor the risk in these funds. The FSB says it has employed a team of finance and investment professionals, headed by Udesh Naicker, which will oversee the registration of the management companies and the hedge fund industry at large.
Existing hedge funds will have a year in which to comply with the regulations.
The regulations provide for two categories of hedge funds: retail funds, which have stricter controls and will be open to any investor; and qualified funds, which will be available only to investors who can demonstrate that they have sufficient expertise to understand the workings and risks of hedge funds.
Retail hedge funds must allow you to redeem your investment after giving a month’s notice, while qualified funds must allow you to redeem your investment after three months’ notice.
Retail hedge funds will be able to borrow against only 10 percent of the portfolio to ensure that there is sufficient liquidity to repay investors. Hedge funds for qualified investors will not have the same restriction.
Certain conditions apply to all hedge funds. For example, they are restricted in the main to using securities and derivatives that are listed on registered securities exchanges. There is also a limitation on the percentage of a fund that may be invested in any one security. These limitations apply to all collective investment schemes, to reduce the risk of major loss in the event of a total failure of a single underlying investment.
Gearing (borrowing to invest) is restricted to a maximum of 20 percent of the total net asset value of the portfolio.
If the portfolio includes derivatives, the manager must ensure that the fund’s exposure to derivatives does not exceed the net asset value of the portfolio.
Novare’s survey shows that most hedge fund managers charge a management fee of one percent of your investment plus a performance fee of 20 percent of any return above a particular hurdle. The performance fee is often not capped.
Currently, the only regulation of hedge funds is that their managers must obtain what is known as a Category IIA licence under the Financial Advisory and Intermediary Services Act from the FSB.
WHAT’S A HEDGE FUND?
Like unit trust funds, hedge funds pool investors’ money to buy shares, bonds, listed property and other securities, but they use a wider range of investment strategies and instruments and they borrow money to invest, making them potentially more risky than unit trusts.
According to a recent survey by Novare Collective Investments, more than 60 percent of South African hedge funds are what are known as long-short funds, which means they invest in securities they believe will increase in price and “short sell” those whose prices they believe will fall.
Short selling involves borrowing a security, selling it before its price falls, and replacing it by buying it again after its price has fallen.