Finally the dust is settling and financial players are refocusing on future growth strategies. In all likelihood we will look back on 2008 as the watershed year for the South African hedge fund industry, which had its origins in the directionally trending bull market of 2003 to 2007 and found it difficult to compete for investor attention when low-priced beta exposure was performing.
The events of 2008 brought home to the investing community the value of a carefully selected hedge fund, particularly when you consider their capital protection capability. The global tide of redemptions certainly reached the shores of South Africa last year, but unlike in the international arena, no South African funds raised their gates.
In the near term, local pension regulations will continue to limit the deployment of funds into the industry, but the hedge fund managers that weathered the storm of 2008 with scale will benefit from consolidation within the industry as investors review their due diligence and relationship capacity.
Hedge fund managers will be reviewing exposure to their own investor base and assessing this for concentration risk. The managers within the industry are tied to the fortunes of their fund, and being personally invested certainly does focus the mind for whatever uncertainty lies ahead.
In terms of regulation, the country seems to offer a pragmatic stance. The South African hedge fund industry has a very positive relationship with the local regulator, the Financial Services Board, a co-operative engagement that has steered the industry away from surprise regulation. The significant influence of fund of funds investors in the local marketplace has also established a culture of segregation, independence and transparency.
This proactive approach of self-governance has been a hallmark of the South African hedge fund industry. Represented by the local chapter of the Alternate Investment Managers Association, the sector has further strengthened its representation within the asset management community by joining with the Association for Savings and Investment SA to establish a regulated hedge fund product within the Collective Investment Schemes Control Act framework.
As we move into a new era, many investors are looking for global strategies that allow alpha extraction with low risk. Segregated mandates and managed account platforms will continue to grow, given the added impetus of the Madoff scandal, which it can be argued has unfairly tainted the hedge fund industry.
But the sector is not isolated from the winds of change that are blowing through the investment community. We live in a world that now relies even more on external governance rather than personal integrity alone.
I believe strongly that Africa will become an area of increased focus on global resource requirements, growth and innovation. African leadership, birthed from the people for the people, will be required to change the destiny of the continent where life began. On the ground, Africa-focused hedge fund managers will become sought after as the global investment community awakens to this opportunity.
Brett Thornton-Dibb is head of prime finance for South Africa at Deutsche Bank