South Africa's retail hedge fund revolution

Cape Town - The South African hedge fund industry seems to be in good health, thanks in no small part to reforms to the regulatory treatment of hedge funds in the country. This month ASISA (The Association for Savings and Investment South Africa), South Africa's asset management trade body, delivered its annual analysis of the state of the industry.

The numbers point towards increased retail investor participation in the market, thanks in no small part to regulatory reforms enacted in 2015.

South African hedge funds attracted record net inflows of R6.24bn in 2023 and grew its assets under management to R137.9bn (excluding fund of funds), according to the latest figures out from ASISA. These assets are invested in 213 hedge funds, which are managed by 11 hedge fund management companies.

The industry recorded healthy net inflows for the second consecutive year. Net inflows in 2022 amounted to R4.54bn.

Unlike many other markets, the retail investor plays a big role in the growth of the South African market. Note that in South Africa retail hedge funds are strictly regulated in terms of the investments and the risks that they are allowed to take and are open to all investors who can afford the average minimum lump sum investment amount of R50,000.

This still makes the average South African hedge fund much more accessible than its counterpart in many parts of the world.

There is a second class of hedge funds, Qualified Investor Hedge Funds, which require a minimum investment of R1 million.  They are open to investors with a solid understanding of the investment strategies deployed by hedge funds and the associated risks.  Hedge funds fall under the Collective Investment Schemes Control Act (CISCA) and are deemed regulated collective investment portfolios.

According to Hayden Reinders, convenor of the ASISA Hedge Funds Standing Committee, and Head of Business Development for the Prescient Fund Services (a global investment administration and platform business with operations in Ireland and South Africa), 32% of assets under management were held by Retail Hedge Funds at the end of December 2023, while Qualified Investor Hedge Funds held 68% of assets.

Yet, the net inflows in 2023 were driven predominantly by the retail funds, which attracted net inflows of R5.1bn. South African Qualified Investor Hedge Funds, on the other hand, recorded net outflows of R1.1bn.

Growing awareness of hedge funds with retail investors

Reinders thinks that there is a growing awareness among retail investors that hedge funds are not high-risk alternatives to unit trust funds.

"Hedge funds are one of the building blocks of a well-diversified investment portfolio to reduce market volatility," he said. "This hopefully indicates that hedge funds in South Africa are increasingly being accepted as an important investment tool in mitigating market volatility."

Retail hedge funds in South Africa have also become more accessible to retail investors in recent years as investment platforms are increasingly willing to offer them to investors. In addition to increased marketing initiatives by some of the bigger hedge fund managers, solid performance has also resulted in greater interest from retail investors. 

Judging from the net inflows, South African multi-strategy hedge funds were most popular with retail and qualified investors in 2023. Multi-strategy hedge funds are classed by ASISA portfolios that do not rely on a single asset class to generate investment opportunities but instead blend various strategies and asset classes with no single asset class dominating over time.

This is the first time in at least five years that South African retail multi-strategy hedge funds outdid retail long short equity hedge funds in popularity. They attracted R2.27bn in net inflows in 2023, while long/short equity funds recorded R2.13bn.

Reinders notes that the role and increasing trend of Hedge Funds in South Africa continues to be very positive.