For an emerging market, South Africa’s hedge fund industry is already well developed and sophisticated.
For an emerging market, South Africa’s hedge fund industry is already well developed and sophisticated. One of the main reasons for this is the well-established asset management industry, which makes it easier to penetrate the alternative asset market place. Further, the multi-year equities bull market has also been very favourable for all funds.
But now is the time for South Africa to prove itself as a competitive funds jurisdiction, with many experts believing that a ‘downturn’ would be a true test for the industry to show its worth. It is argued that the global financial instability is perhaps the right time for the funds industry in South Africa to fine-tune itself to the regulatory requirements and search for niche areas that will help cement its place as a global funds jurisdiction.
The progress thus far has been good – and indications are that South Africa is set to rise above the uncertainty brought on by the credit crunch and cement its position as a competitive funds jurisdiction. While the credit crisis has been affecting markets globally, the impact on South Africa has been comparably less. Barry Shamley, Head of Trading at Oryx Investment Management says: ‘Effects of the credit crunch were felt globally but the magnitude was not as severe in South Africa. Thankfully the local commercial banks stayed well away from the toxic debt and no writedowns were made by the big four. We did however experience volatility in equity markets as the widening global credit spreads caused equity risk aversion among investors.’
The credit crunch as it relates to the effect of rising inflation and the cost thereof has brought about a chain of causal events such as and amongst others, increased cost of borrowing, increase in general price levels of goods and services and decreased savings and investments. The last mentioned spin-off impacts on the funds industry in South Africa and globally. Subsequently, fund managers would have experienced reduced inflows from these investors therefore discouraging the launching of new funds.
However, the impact on South Africa has been limited. The Johannesburg Stock Exchange (JSE) indicated in statements that it did not feel a noticeable impact from the credit crunch and remained largely unaffected especially during the first half of 2008 even though it affected various other markets and stock exchanges. Activity and volumes continued to soar on the JSE despite the crisis. Gerry Anderson, Deputy Executive Officer of Market Conduct & Consumer Education at the Financial Services Board (FSB), explains: ‘This would suggest that fund activity was not necessarily slowed down by the phenomenon. The FSB continues to process applications in respect of discretionary services providers who manage funds. The FSB has not noticed a marked decrease in the number of discretionary service providers who manage funds. Only a handful of funds that closed down in the past couple of months came to the attention of the FSB and the reasons for the closure vary but are not necessarily restricted to the effects of the credit crunch.’
As already mentioned, South Africa has been fairly insulated from the credit crunch with the effect on banks (and consequently funds) much less severe than in the developed economies. There have been instances of large foreign disinvestments from South African hedge funds which could have been induced by the negative ‘credit crunch’ sentiment. Historically, more conservative lending practices (because of higher interest rates) coupled with the introduction of the National Credit Act (NCA) protected banks from the over-exposure experienced in other economies. Veit Schuhen, CEO of Maitland’s Fund Services division says, ‘Financials have suffered during the course of the year, with a notable divergence between the Resources and Financials index on the exchange. South African investors have been largely protected from the financial turmoil worldwide because of our booming resources sector, but we have seen the market suffering some sharp draw-downs on the back of cooling commodity prices recently.’
Even though the credit crunch has brought about some uncertainty for fund managers, inflows into funds have however continued to be realised with no marked decrease, according to Anderson. ‘The major talks within the industry continue to be around consolidation and the tightening of belts in respect of fund managers’ activities as far as investor capital protection, growth and consistent returns on investments is concerned. This is in an attempt to encourage investors to remain invested and not shy away as a result of fear of loss of investment. Fund managers, while remaining fairly conservative in what they do, realise the need to be re-inventive and venturing into new strategies that can see them generate better returns for their investors,’ he clarifies.
Experts are anticipating that fund managers will continue to consolidate, remain fairly conservative and keep a close eye on their activities and the markets in expectation of them gaining momentum again and moving in an upward trend. ‘Many managers have started with the process of centralising and consolidating as far as their activities are concerned. This includes refining investment processes, reviewing investment philosophies and scaling down on overheads without hampering performance. The fund administrators play a crucial role in this sphere. Their service offerings are continually improved on a diversified basis in order to accommodate and cater for the ever changing needs of the funds as their complexity increases. New strategies are expected to be discovered going forward,’ Anderson says.
There have also been recent regulatory amendments to facilitate the funds industry. The publication of the hedge funds legislation which came into effect at the end of April 2008 necessitated the application for discretionary financial services providers’ licenses in respect of the management of hedge funds by previously unregulated fund managers of such funds. The approach of the FSB has been to ensure that there is parity of regulatory standard between the foreign regulatory environment and South Africa, and that the products offered are of a similar structure and risk profile to those offered by a South African collective investment scheme.
Anderson adds, ‘From a regulatory perspective, we will see a move into consolidation and refinement of the legislation that we enforce. The process has started in some parts of our legislation such as the fit and proper requirements to be met by the current FSPs and prospective applicants. The aim is not to create barriers and therefore restrict entry but to ensure that persons involved in financial services and therefore approved are suitably qualified and experienced. This principle is also applicable to hedge fund managers. Suitably qualified and experienced managers should not find the requirements too difficult to comply with.’
Another important facet to note is the fact that the legislation lays down minimum qualification and experience requirements which if met will make the fund managers eligible for approval. It is noteworthy that while these new refinements will become effective, the process toward compliance will be a gradual phasing allowing sufficient time to fund managers to get themselves compliant. ‘The funds industry is generally pro legislation and the need for stricter regulation is a common topic in the industry. This in turn makes the process an even easier exercise to undertake,’ says Anderson.
When South Africa finally abandoned the apartheid system in 1994, skeptics were unsure of the true nature of developments in the country. However, the country’s hedge fund industry is thriving supported by an impressive degree of political stability. It is clear that the credit crunch has made progress a little uncomfortable. Further, regulatory developments are also required (which the FSB is addressing) to ensure sustained growth of the industry.
But there is also no doubt that the funds industry is experiencing phenomenal growth. It is anticipated the growth will continue with perhaps a slight slack despite the occurrence of events such as the credit crunch. Some markets feel the effects and impact of such events a whole lot more than others, thus not necessarily making it too difficult for managers operating in the less influenced markets. Anderson adds, ‘The effects of the credit crunch are for instance more likely to have a significant impact on the fixed interest funds as opposed to the equity markets. All the event prompts is conservatives and managers adopting more passive strategies in the hope that things will normalise or alternatively embarking on other strategies perceived to be effective under the circumstances.’
According to Anderson, the funds are growing themselves to targeted critical mass and managers remain mindful of capacity and manageability. ‘The growth in the industry brings about diversification and competitiveness among the existing funds and niche opportunities for emergent funds that realise exploitable opportunities.’
