The new Asisa Hedge Fund Classification Standard comes into effect on January 1 next year. Photo: File

South African hedge fund managers have begun the process of categorising their hedge fund portfolios in line with the provisions of the new Hedge Fund Classification Standard, which was recently introduced by the Association for Savings and Investment South Africa (Asisa).

The new Asisa Hedge Fund Classification Standard comes into effect on January 1 next year.

Sunette Mulder, senior policy adviser at Asisa, said that the aim of classifying all hedge fund portfolios into different categories is to make it easier for investors to assess and compare funds and to select hedge funds appropriate for their risk profiles and investment portfolios.

In April 2015, South Africa became the first country to put in place comprehensive regulation for hedge fund products. The regulations provide for two categories of hedge funds: qualified investor hedge fund portfolios and retail investor hedge fund portfolios. As a first step, this required the hedge fund industry to convert their hedge fund products to structures that conform to the provisions of the Collective Investment Schemes Control Act.

The Asisa Hedge Fund Classification Standard provides for four tiers of classification. The first tier splits hedge fund portfolios into either retail investor or qualified investor portfolios.

The second tier classifies hedge fund portfolios according to their geographic exposure:

1. South African portfolios invest at least 60 percent of their assets in South African investment markets.

2. Worldwide portfolios invest in South African and foreign markets. There are no limits set for either domestic or foreign assets.

3. Global portfolios invest at least 80 percent of their assets outside South Africa, with no restriction to assets of a specific geographical country or a geographical region.

4. Regional portfolios provide investors with at least 80 percent exposure to assets in a specific country or a geographical regional.

The third tier is based on the manager’s investment strategy:

1. Long short equity hedge funds are portfolios that predominantly generate their returns from positions in the equity market regardless of the specific strategy employed.

2. Fixed income hedge funds invest in instruments and derivatives that are sensitive to movements in the interest rate market.

3. Multi-strategy hedge funds over time do not rely on a single asset class to generate investment opportunities but blend a variety of different strategies and asset classes with no single asset class dominating over time.

4. Other hedge funds apply strategies that do not fit into any of the other classification groupings.

The fourth tier of classification applies only to long short hedge fund portfolios. These portfolios are further categorised as follows:

1. Long bias equity hedge funds. These portfolios will over time aim for a net equity exposure in excess of 25 percent.

2. Market neutral hedge funds. These portfolios are expected to have very little direct exposure to the equity market. On average over time, net equity exposure should be less than 25 percent but greater than -25 percent.

3. Other equity hedge funds. This category is for portfolios that follow a specific strategy within the equity market such as listed property or sector specific strategies. 

Supplied by the Association for Savings and Investment South Africa