The wait is over, the news that hedge funds have long been awaiting for is finally in act. As of April 1st 2015 hedge funds have been declared as Collective Investment Schemes (CIS). This, although not new news for the market players, will ensure stricter regulation, tighter control and greater transparency in an industry that largely seeks to prove to the general public that it isn’t as risky as the world perceives it to be.
Regulation amendments set to encourage investment into an industry that currently sits at R58 billion, a drop in the ocean compared to that of South Africa’s Unit Trusts, which at present equates to R1 trillion under management. The past five years has seen the hedge fund industry double in AUM, on the back of trustees and institutions being made aware of the ever expanding opportunities hedge funds propose for one’s portfolio.
Hedge funds, which were initially designed to protect capital in the event of a market downturn while still providing managers with effective strategies to profit from bull markets, were mostly inaccessible to the general public. The South African hedge fund industry was primarily focused on institutional investors or high net worth individuals able to invest a minimum of R1 million.
The change in regulation aimed at broadening the investor base entails a two-tiered approach; retail in investor hedge funds (RIHF), which are open to the general public and are subject to more stringent regulation, as well as qualified investor hedge funds (QIHF), which are only accessible to investors who are able to demonstrate knowledge and experience in financial matters who in turn are subject to less cumbersome regulation. Once registered through the FSB as either a retail or qualified investor, the act stipulates similar but separate regulation applicable to both tiers. Hedge Fund Managers that aim to operate in the retail space will be required to adhere to additional restrictions. Fund gross exposure may not exceed a maximum of 200%, disclosure to investors must at a minimum occur on a monthly basis and fund liquidity must be managed such that the redemption of capital can be facilitated within one calendar month. Funds must subscribe to independent risk analysis, performed by a third party, not associated with the fund.
The change in regulation is set to encourage retail investment through greater protection as well as assistance in the monitoring of systematic risk present in the financial industry. Minimum lump sum amounts will still be high, and aren’t likely to take away any investments into unit trusts or even the newly available Tax Free savings accounts. The change in regulation for the next couple of years will encourage cautious institutional investors who are looking for protection as well as a transparent environment, to “test the waters” of a different investment alternative. The stricter mandates and risk parametric associated around retail funds will help convince investors of the benefits that can be associated around the hedge fund industry.
Although it is still to be seen who will invest into these retail funds, the future of the hedge fund industry seems bright, with new regulation comes new ideas and opportunities, the industry should without doubt see an encouraging increase of investment into funds through this retail offering. All market participants who expected hedge funds to be made more freely available and affordable to the general public, will need to hold tight a while longer, as it is still a market that requires a high amount initial capital from investors. That being said the FSB has taken the necessary steps in opening up the market and promoting the development of this financial market.
– Andrew Bovell
Mullti-manager Solutions, RisCura
– Nikolaas Delpoort
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