For the first time since 2011, assets under management in the local hedge fund industry have shrunk, dropping 9.1% to R62.2 billion over the past year.
This is according to the 14th annual Novare Hedge Fund Survey, which researched key trends among 52 hedge fund managers collectively responsible for 98 uniquely mandated hedge funds. The survey covered the year ending June 30 2017.
The drop in assets is the result of in-house consolidations of product offerings as managers transitioned to a regulated environment, meagre performance and outflows.
Since 2015, hedge funds are classified as collective investment schemes and have become more accessible to a broader investor base – retail investors in particular. According to the survey, more than 90% of industry assets have successfully transitioned into the regulated environment.
Eugene Visagie, head of hedge fund investments at Novare, says managers had to obtain client approval for the move to the regulated space, but several clients preferred to go the long-only route, which resulted in outflows from the hedge fund industry (although not necessarily from the manager itself).
He estimates that almost a third of the decline can be attributed to assets flowing from hedge funds into the long-only space. This is probably as a result of advisors arguing that it would be more cost efficient.
During the last few years, a lot of hedge fund managers have launched long-only portfolios that look similar to the hedge fund portfolios, but fees are less in the unit trust portfolios.
Visagie says several managers have consolidated their product offerings instead of covering the whole risk spectrum, which could also have resulted in outflows.
Some smaller hedge funds decided to close down because they weren’t attracting flows.
Especially in a regulated space, hedge funds need a substantial asset base – arguably a minimum of R50 million with scope to grow to at least R100 million within a year, he says.
There are definitely additional costs involved with this regulatory burden, he adds.
Visagie says the main driver of asset growth in the hedge fund industry has historically been very strong performance, with managers achieving returns of between 10% and 15% on average over the last few years, but since the start of 2016, the market has been disrupted by several events, including Nenegate, Brexit and the election of President Donald Trump in the US.
“The biggest detractor during calendar year 2016 was that none of the managers anticipated the rand strengthening as much as it did over the course of the year. A lot of the managers had exposure to large rand hedge momentum-type of stocks. These stocks really struggled last year and did not contribute to performance.”
Funds managing between R500 million and R1 billion achieved the best returns during the year under review and also attracted the largest net inflows. Large funds managing more than R1 billion of assets, saw their performance come under pressure and experienced net outflows of close to R2 billion as they struggled to react quickly to market changes. The All Share Index delivered 1.6% over the period, the All Bond Index 7.9% and cash 7.6%. The performance of the various categories of managers is set out in the graph below.
While retail investors can now invest in hedge funds as collective investment schemes, the uptake has been very slow, Visagie says. Although investors are aware of it, a lot of education is still required.
He is optimistic about the growth prospects of the hedge fund industry and says although it is still small (representing less than 1% of total assets) it has the potential to be a key role player in the South African savings industry.
“With that being said, the industry will need to raise assets from external players in order to get there. This is where the new regulation is of particular importance as it has provided a much-needed structure for making hedge funds marketable to new investors.”
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