Written by Charles Gubert

South Africa remains Africa’s pre-eminent hedge fund jurisdiction with Assets under Management (AuM) now standing at R61 billion ($5.1 billion) at year-end 2014, as the industry continues to grow, delegates at Fund Forum Africa in London were told.

This represents a growth from R42.2 billion ($3.5 billion) in 2013, according to data compiled by Novare Investments, an independent investment advisory business based in South Africa. Novare said in its report that the increased AuM in South Africa’s hedge funds was attributable to the strong performance by its managers, particularly its equity-focused hedge funds, and impressive net flows.

In terms of strategy, equity long/short represents 59.9 per-cent of industry assets, and it is recipient to the majority of new capital inflows. The Novare study added almost 80 per-cent of industry assets are managed by individuals with more than five years experience in the hedge fund industry. 

As with the rest of the world, the bulk of capital is concentrated in a handful of the largest managers. Half of assets are managed by the top five firms, while 83 per-cent of industry assets are controlled by the top 15 firms, added the Novare study.

Novare highlighted 63.6 per-cent of net cash flows was allocated to hedge funds managing more than R2 billion ($165 million), while 20.5 per-cent flowed into managers running R1 billion ($82 million) to R2 billion ($165 million). Firms running between $500 million ($41 million) but less than R1 billion received less than 6.3 per-cent of new inflows.

The South African hedge fund industry has had difficulties, which has somewhat stymied its ability to raise meaningful international and domestic institutional capital, according to one attendee.  In July 2012, Herman Pretorius, a hedge fund manager, murdered his business partner before committing suicide himself following a visit from the country’s Financial Services Board, which was investigating whether Pretorius was running a Ponzi scheme.

Nonetheless, South Africa is a leading financial centre and is well-positioned to develop as a key hedge fund market. The World Economic Forum’s 2014-2015 Global Competitiveness Index Report ranked South Africa 7th overall and 1st for regulation of its securities exchange, 3rd for financing through local equity markets and 6th for the availability of financial services and soundness of its banks. It also is one of the developing market’s leading derivatives centres.

In addition, regulation of South Africa’s burgeoning hedge fund industry has finally come into fruition after several years of debate. It was announced on March 6, 2020 that rules distinguishing between qualifying investor hedge funds and retail hedge funds would take effect.

It will require qualifying investor hedge fund managers to obtain a declaration of eligibility from clients confirming their suitability to invest. The obligations imposed on retail hedge funds are tougher and subject managers to counterparty risk restrictions, prudential asset class requirements and derivative requirements, according to a report by Allen & Overy. Some believe these rules could precipitate the emergence of a  South African UCITS.

FundForum Africa is currently taking place in London.