Records tumble in best year yet for South Africa’s hedge fund industry

• All-time high in assets under management with record growth

• The value of AUM increase exceeds the size of the industry before 2013

• Retail investors are piling in, closing the gap with qualified investors

Issued by Novare Holdings

South Africa’s hedge fund industry had its best year yet in 2024, with assets under management (AUM) reaching a new all-time high of R152.7 billion, according to the 2024 Novare Hedge Fund Survey.

The industry’s AUM grew by 43%, increasing from R106.8 billion in 2023 – its fastest growth rate since Novare started the survey two decades ago. In absolute terms, the R45.9 billion increase in AUM surpasses the total size of the industry prior to 2013.

Growth was driven by R24.1 billion in net inflows from investors and an additional R20.9 billion in investment gains, as hedge funds benefited from strong performances in local equities, bonds, and diversified strategies. It also reflects growing investor preference for hedge funds due to their agility, downside protection, and ability to generate absolute returns.

“Last year was a significant year for South African hedge funds,” said Ola Lepile, CEO of Novare Holdings. “Hedge funds are finally starting to earn their place in investors’ portfolios as they consistently prove their value.”

Of the 152 funds managed by 64 managers surveyed by Novare, 70 are classified as Qualified Investor Funds (QIFs), managing R78.98 billion, or 51.7% of total AUM. Retail Investor Funds (RIFs) closely follow, with 78 funds managing R72.06 billion, or 47.2% of the market, compared with 42.9% in 2023 (PLEASE DOUBLE CHECK IF 42.9% STILL RELEVANT).

Retail funds recorded R22 billion in inflows and just over R3 billion in redemptions, resulting in net inflows of around R19 billion. Performance gains added a further R7.5 billion. Meanwhile, QIFs attracted R6 billion in inflows and R2.5 billion in outflows, netting R3.5 billion in new capital – but delivered stronger returns, contributing an estimated R13 billion in performance gains.

Unlike RIFs, QIFs are allowed to pursue more complex and less liquid investment strategies, giving them greater potential to generate alpha, or outperformance relative to the market, by tapping into niche opportunities that fall beyond the stricter regulatory limits imposed on retail funds.

More than 70 hedge funds now offer daily pricing, making them more accessible through Linked Investment Service Providers (LISPs) and Discretionary Fund Managers (DFMs). This development has broadened access to the hedge fund market for a wider range of financial advisers and retail investors.

The survey revealed additional interesting trends:

• Strategy performance and trends

Growth was widespread across strategies, with some sectors standing out. Multi-strategy funds, which combine different investment approaches to reduce risk and enhance flexibility, experienced the fastest growth among the main categories, increasing by 84% to R21.3 billion, as investors sought more diversified solutions. Equity Long/Short – Long Bias strategies continued to dominate, with assets climbing 39% to R66.7 billion. Equity Market Neutral strategies grew by 52%, while Fixed Income strategies increased by 28%. Meanwhile, Short Bias funds, designed to profit when markets fall, surged by 243%, albeit from a small base, with one standout performer accounting for most of the gains.

• Institutional dominance persists

Despite the increasing accessibility of hedge funds, the industry remains concentrated among larger players. The top 10 managers now oversee R105 billion, or 69% of all hedge fund assets – up from 65% last year. Most new capital flowed to the largest firms, with those managing over R2 billion capturing 87% of 2024’s net inflows. Interestingly, mid-sized managers delivered the strongest returns, with funds managing between R500 million and R1 billion yielding an average return of 21.3%, outperforming their larger and smaller counterparts.

• Fee structures are gradually evolving

Fees are beginning to shift as competition and investor scrutiny intensify. While management fees remain typically between 1% and 2%, and the 20% performance fee remains standard, some newer funds are adopting more streamlined pricing models. There’s a gradual move towards lower-cost or performance-only fee structures that better align managers’ incentives with investor outcomes.

• Transformation remains uneven

Transformation within the industry remains disappointingly slow. Of the 64 hedge fund firms surveyed, just over half disclosed their B-BBEE status. Among these, 32% achieved a Level 1 rating, the highest, while another 32% were non-compliant. The data also highlight ongoing diversity gaps: white professionals occupy 66.1% of senior management roles, and men account for nearly three-quarters (72.6%) of leadership positions.

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