The day the local hedge fund industry has been waiting for

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After years of lobbying, the local hedge fund industry may just be getting the boost it has been seeking. Currently, Collective Investment Schemes in Securities (colloquially know as Unit Trusts or CISs) are prohibited from investing in hedge funds. This has limited the growth of the hedge fund industry in South Africa as a large portion of investable assets are managed via CISs.

The Regulator (the Financial Sector Conduct Authority (FSCA)) has just published a Draft Amendment which determines the classes of assets that a CIS may invest in. There are three main proposed changes, and the one that the local hedge fund industry is getting excited about relates to the proposal whereby a CIS may now invest in a Retail Hedge Fund.

The proposal does, however, include certain provisions detailed by the FSCA in their document entitled “Statement Supporting Draft Notice of Amendment of Board Notice 90 of 2014”. The main provisions are as follows:

  • The hedge fund must be a retail hedge fund which is daily priced and daily traded
  • The CIS investing in a retail hedge fund must be a Regulation 28 compliant CIS
  • The CIS may invest in a retail hedge fund up to the same limits as provided for in Regulation 28 (which is currently 2.5% for a single retail hedge fund and 5% for a single retail fund of hedge funds, up to a total limit of 10%)

The above mentioned proposal is based mainly on the premise that:

  • Hedge funds offer different risk and return payoff profiles to other asset classes and therefore there are clear benefits for including hedge funds in a CIS
  • Hedge funds are regulated in the South African environment
  • Retail hedge funds are already available for retail investors to invest in directly
  • Pension Funds are currently allowed to invest in hedge funds and therefore to ensure there is a “level playing field”, those CISs that are regulated and marketed as being Regulation 28 compliant, should also be allowed to invest in hedge funds.

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So what does this mean for the hedge fund industry? Well according to the document supporting these proposed changes from the FSCA, this could be a boost to the local hedge fund industry of an estimated R 25.7billion. However, as this number seems to be based purely on what is invested in CISs by retirement funds (Retirement Annuities, Preservation, Pension and Provident Funds) via LISPs, we believe the actual figure could be much higher due to not all investors in Regulation 28 complaint CISs being retirement funds.

Interesting times ahead indeed, for the local hedge fund industry!

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