As South Africa’s young but fast-growing hedge fund industry seeks changes in the country’s regulatory environment to help it broaden its investor base among institutions at home, a crucial task is
As South Africa’s young but fast-growing hedge fund industry seeks changes in the country’s regulatory environment to help it broaden its investor base among institutions at home, a crucial task is to help create wider understanding about alternative investments across the country.
Wide disparities in hedge fund knowledge currently exist among South African investors. Blue Ink Investments, which was acquired late last year by Swiss-based alternative fund of funds provider Octane Group, offers products aimed at private clients while affiliated company Legae Capital, a black-empowered fund of hedge funds provider, serves the institutional market.
Legae has attracted business from some of the country’s big pension funds, but even in this area understanding about the benefits of alternative investments is quite selective. Some clients are keen to invest in hedge funds as useful portfolio tools, but for others it’s harder to get the message across. There’s a lack of expertise in the broader investment community, and it’s largely the industry’s responsibility to educate investors about the benefits of hedge fund investment.
This may become more urgent if restrictions on institutional investment in hedge funds are relaxed. At present the main allowance is the 2.5 per cent of total assets that pension funds may allocate to ‘other’ investments, which also includes areas such as private equity, although some hedge fund investments are structured as debentures to qualify for a larger investment allowance.
However, the small size of the allocation to hedge funds possible at present discourages some pension funds from devoting time, effort and resources to developing expertise in this area and conducting the due diligence necessary before making an investment. The regulatory authorities are currently examining the rules governing trustees’ investment allocations, and managers hopes any relaxation of the restrictions will encourage greater use of hedge funds within pension scheme portfolios.
This makes sense for South Africa because here as elsewhere in the world, hedge funds are now a permanent part of the investment industry. Over time the number of funds will continue to grow, regulations will gradually be liberalised, and investors that have already put a toe in the water will be at an advantage, because many of the best managers whose funds are currently open to investment are building up track records and attracting assets much faster than their less experienced colleagues. Gaining access to leading managers now will yield benefits in the future, when those funds may be closed to new investors.
Like the institutions, private individuals vary in their knowledge of hedge fund investment, although there is widespread appreciation of managers’ ability to generate returns uncorrelated with traditional equity and fixed income investments. But many of the high net worth individuals to whom we are now gaining access use sophisticated brokers or financial advisers who have made the effort to understand hedge funds and impress on their clients the importance of protection against a future downside.
The group offers a range of funds of funds varying in risk profile from conservative, low volatility products to more aggressive and concentrated portfolios. While private clients are predictably attracted by the higher returns offered by the aggressive strategies, institutions also initially preferred these portfolios. However, more savvy institutional investors are now looking for more conservative funds of funds that can provide returns with lower volatility.
Lee Dalley is a portfolio manager with Blue Ink Invest