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Benchmarking South Africa’s hedge funds

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How attractive are South African hedge funds as an investment opportunity? And is your fund or fund of funds outperforming or underperforming?

How attractive are South African hedge funds as an investment opportunity? And is your fund or fund of funds outperforming or underperforming?

In an industry as opaque as that of hedge funds, these questions used to be difficult to answer. Which is why in August 2006, the Bond Exchange of South Africa Limited teamed up with Clade Investment Management to create the South African Hedge Fund Index, and why Clade launched an investible version of this index allowing investors passive exposure to this asset class as a whole.

The Bond Exchange of South Africa is an independent exchange responsible for operating and regulating the debt securities and interest-rate derivatives markets in South Africa. The organisation was granted its exchange licence in 1996, and last December entered a new era by converting from a mutual association to a public company.

Clade is a leading South African asset manager and authorised financial services provider offering equity, bond and hedge fund investible indices and exchange-traded funds. It is a subsidiary of the Clade Group, which currently has just over ZAR9bn in assets under management.

The South African Hedge Fund Index provides accurate information and credible data regarding hedge funds from a regulated financial exchange. The index offers a representative and comprehensive depiction of the performance of all eligible hedge funds in the South African market, and provides investors with a replicable benchmark of returns against which funds and funds of funds can be compared. The investible version allows investors to access these returns simply and cheaply.

As of October 2007, 32 managers with assets under management of ZAR9.6bn were included in the index. At the end of June 2006, South African hedge fund industry assets were estimated at ZAR18bn by Novare Investments, rising to an estimated ZAR26bn12 months later.

This change represents growth of 39 per cent for the industry, and is in line with the growth in assets under management of the index, at 41 per cent. In the SAHFI universe, the number of funds has increased from 55 in September 2006 to 73 a year later with a total value of R15bn in assets under management.

A due diligence process is carried out on the funds identified to ensure they meet the eligibility criteria and are willing and able to submit timely monthly data for index construction.

In order to be eligible, funds must be based in South Africa and report in rands, have at least ZAR30m million  in assets under management, be open to new investment, outsource administration to a third-party service provider, offer at least monthly liquidity to investors, and report within three weeks of the end of each month.

So how has the asset class performed? Since launch with a base date of March 2004, the SAHFI has grown by an annualised 19.54 per cent in rand terms, with a standard deviation of 5.17 per cent. In US dollars the return has been 17.08 per cent.

This can be compared with the HFRX index of global hedge fund returns of 4.50 per cent, the MSCI World Index of equity market returns of 11.90 per cent, and the Citigroup World Government Bond Index return of 2.52 per cent over the same time period and denominated in US dollars. How does your asset class, hedge fund or fund of funds compare with the benchmark and investible index?

Marilize Lansdell is general manager for market development at the Bond Exchange of South Africa, and Gavin Goldblatt is managing director of Clade Investment

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