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Novare’s 20th annual hedge fund survey shows that individual investors increasingly embrace hedge funds. However, despite another year of growth, the industry still has a long way to go when it comes to diversity and inclusion.
South African hedge fund assets hit a record high of R106.8 billion in 2023, fuelled by growing interest from retail investors and strong returns, according to the Novare Annual South African Hedge Survey.
“We’re excited to see more individual investors exploring hedge funds to protect and grow their wealth,” said Novare Portfolio Manager Kwazi Mbhele. “This growing interest shows how hedge funds are becoming a valuable option for more South Africans.”
The Novare survey of 66 hedge fund managers, who combined oversee 159 funds, found that retail investor hedge funds are catching up with funds designed for qualified investors. In 2023, retail hedge funds accounted for 42.9% of total assets under management (AUM), up from 38.5% the previous year, while the share for qualified investors declined by 4.5 percentage points to 55.7%.
This trend could accelerate following proposals by the Financial Sector Conduct Authority (FSCA) in 2023 that Collective Investment Schemes (CIS) be allowed to invest in retail hedge funds. These adjustments aim to make hedge funds more accessible and transparent for everyday investors, something the industry has long called for.
Hedge funds are becoming increasingly popular among retail investors due to their potential to generate returns even in declining markets. By incorporating hedge funds into their portfolios, investors can access a variety of strategies that help balance risks – offering stability and the promise of growth during volatile periods and market stress.
Asset growth was resilient in the face of tough economic conditions in South Africa, said Mbhele.
Total industry AUM grew by R12.8 billion, or 13.7% – the slowest pace since 2019 – as fund closures, withdrawals in Qualified Investor Hedge Funds (QIHFs), and consolidation weighed on growth, according to the Novare survey. This comes after two years of impressive growth of more than 20%.
Inflows of R6.1 billion into Retail Investor Hedge Funds (RIHFs) and a R9.2 billion boost from performance gains helped the industry post net inflows of R3.2 billion for 2023, according to the data compiled by Novare.
The industry experienced R3.2 billion in outflows from QIHFs in 2023, alongside the closure of 14 hedge funds, resulting in a loss of R980 million in assets. Additionally, another R140 million exited the industry due to fund consolidations. While participation from Fund of Hedge Funds as allocators has been in decline, there was a modest recovery in 2023.
This year marks the 20th edition of Novare’s trusted insights into South Africa’s hedge fund landscape. The Novare Annual South African Hedge Fund Survey has become a go-to resource, offering a clear, objective look at the industry by gathering first-hand insights from managers around the country into one concise report.
2023 was a mixed year for the global economy. Recession worries lingered, especially in developed countries, and conflicts like that in Ukraine continued to push up energy prices and strain supply chains. While inflation eased a bit, central banks kept interest rates high to prevent prices from rising again. In South Africa, stocks were resilient, and bonds gained, drawing investors looking for high yields, despite the country’s economic challenges.
Race and gender shortcomings
Even as hedge funds attracted more retail investors and expanded in terms of assets, challenges remained at the top levels of the organisations regarding race and gender.
Disappointingly, only 27 out of 66 managers took part in this section of the survey, meaning 39 managers, or almost 60% of those approached, did not provide data on their Broad-Based Black Economic Empowerment (B-BBEE) status. This is not a new trend, year after year, there’s been a lack of participation in the transformation and diversity sections of the survey.
The industry remains male-dominated. Among those who participated, 75% of senior management positions were held by men, Novare’s survey found. White individuals make up 62.4% of senior managers.
“This highlights the need for continued efforts towards diversity and inclusion,” said Novare CEO Olaotse Leepile.
According to the survey, the representation of African managers in senior roles has grown slightly, reaching 16.1% in 2023 from 13.9% for each of the past two years. Indian representation increased to 9% from 6%, and Coloured representation rose to 10.5% from 6.9% in 2022, the data show.
“Despite the progress, it falls far short of South Africa’s broader demographics, suggesting there is still significant room for improvement,” said Leepile. “While these figures show some diversity within management structures, they are still significantly lower compared to the White demographic.”
On average, females occupy 25% of senior management roles in the industry, which is too low and indicates that more efforts are needed to improve female leadership representation.
In terms of the overall scorecard for Black empowerment, B-BBEE ratings among participating hedge fund managers showed 40.9% of managers had a level 1 rating in 2023, according to the data compiled by Novare.
However, the percentage of managers who do not have a B-BBEE rating or non-compliance rose to 30%. The Novare survey showed that 14.8% of managers had a level 2 rating, while 7% reported having level 4 and 8 ratings. The 2022 survey showed that there was a non-compliance rate of 22%.
Hedge fund managers delivered strong returns across various strategies. Those with AUM between R1 billion and R2 billion emerged as top performers, with average returns of 14.3%. According to Novare’s data, smaller managers with less than R100 million performed worst.
The survey also highlighted that large hedge fund managers with AUM of more than R2 billion still dominate the industry. The portion of assets managed by firms of this size increased slightly from 69.5% in 2022 to 69.8% in 2023, while assets managed by hedge fund managers with AUM of between R1 billion and R2 billion saw their share rise to 18.6% in 2023 from 14.1% the previous year.
Novare’s survey revealed that in terms of costs, most funds charged between 1% and 2% per annum, with fewer adopting high-cost models. Only one fund charged above 2.5% in 2023.
“At Novare Holdings, we’re dedicated to sharing insights that help all investors make informed choices,” said Leepile. “We’re proud to play a part in building a more transparent and inclusive hedge fund landscape.”
Novare has been a pioneer in South Africa’s hedge fund industry, launching one of the first regulated and largest fund of hedge funds. “By bringing together the industry’s top-performing hedge fund managers into our funds of hedge funds, we make it easier for investors to access products that consistently outperform individually managed funds, emphasising capital preservation and delivering solid, low-risk returns,” he said.
“Beyond our track record, we’re also set apart by our in-house management company, which enables us to provide flexible, cost-effective fees and a comprehensive suite of services for those who need them,” Leepile concluded.
Since 2004, the Novare Annual South African Hedge Fund Survey has served as a trusted resource to help the industry stay ahead. This commitment to understanding the market not only strengthens our own expertise, but also supports the broader industry, enhancing its transparency and visibility.
For more information, please visit www.novare.com or contact us at [email protected].
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