The recently announced changes to Regulation 28 of South Africa’s Pension Funds Act, which are effective from 1 July this year, could result in an eight times surge in assets under management in the hedge fund space.
Anton Hormann, head of Business Development at Blue Ink Investments, says the industry, which currently manages ZAR30 billion of local investor funds, could swell to ZAR240 billion over the next couple of years.
One of the key changes to Regulation 28 is that both institutional and retail investors will be able to invest up to 10% of their assets in hedge funds. Previously hedge fund investments were accommodated in a narrow 2.5% slice reserved for other investments, including private equity. “National Treasury’s decision to allocate 10% to hedge fund investments is long overdue,” says Hormann.
He adds that the change is the latest in a series of regulatory developments that will result in hedge funds becoming a more attractive option for both retail and institutional investors. “Although hedge funds remain unregulated as a product, fund managers are now required to obtain a category 2A license from the Financial Services Board (FSB). The hedge fund industry is also keenly awaiting developments from the ongoing discussions with the Association of Savings and Investments South Africa (Asisa) and the FSB on full-blown regulation for the industry. We believe regulation is essential in order to level the playing field for hedge funds.”
Hormann says one of the biggest opportunity for growth in assets under management for hedge funds comes from smaller pension funds, which have assets under management range between ZAR100 million and ZAR1 billion. “In the past, the 2.5% investment limit meant only the largest pension funds, such as Transnet with ZAR60 billion under management, could make meaningful use of the downside protection offered by hedge fund investments. Regulation 28 makes it possible for smaller funds to consider hedge funds as a viable alternative.”
He says the changes to Regulation 28 will also impact on retail investors who will be able to increase their hedge fund exposure to 10% in pension funds at member level. “We do not however expect massive inflows from the retail market immediately, as it will take some time for private individuals to fully understand the benefits of exposure to this asset class.”
He says demystifying hedge funds remains one of the biggest challenges for the industry. “There is still a perception that hedge funds are a risky asset class. However, the performance of hedge funds in South Africa, particularly on a risk adjusted basis, shows that they have on average outperformed all other asset classes.
The results of the 4th quarter 2010 Blue Ink All South African Hedge Fund Composite (BIC), which tracks the performance of around 100 hedge funds in South Africa, reveals that Hedge Funds outperformed the All Share Index (ALSI) by almost 10% over a three-year period between 1 January 2008 and 31 December 2010. Investors who stuck with Hedge Funds earned total returns of 30.28% versus 20.60% from equities.
“The expected flow of funds into the hedge fund industry will be a welcome development. Hedge funds that have closed their doors in recent years did so because of a lack of fresh investment rather than fund irregularities or poor performance,” says Hormann. Regulation 28 is a huge step forward in terms of the recognition of the hedge fund industry and will hopefully accelerate the regulation of the industry too.”