In South Africa, 2016 saw less inflows into hedge funds, which may be due to the change in regulation, according to Eugene Visagie, Head of Hedge Fund Investments at Novare.

In 2015, National Treasury and the Financial Services Board announced that hedge funds would officially be regulated under the existing Collective Investment Schemes Control Act, No. 45 of 2002 (CISCA), which also encompasses the well-known local unit trust industry.

Today, the South African hedge fund industry is still very much in the process of transitioning and adapting to the regulated environment. 

“The immediate assumption would have been that more Retail Investor Hedge Funds (RIHFs) would come to the fore due to the regulation, but more than two thirds (67.8%) of managers have elected to be Qualified Investor Hedge Funds (QIHFs) and only 32.1% are RIHFs,” said Visagie.

“The industry net flows were not as good this year as it was influenced by regulatory uncertainty from fund managers. It is yet to be seen what shape the industry will take on and whether a divergence will realise in the QIHF versus the RIHF space,” he explained.

Last year it was noted that a significant amount of existing hedge funds could fit into the RIHF framework, however, most managers still chose to be classified as QIHFs.

Under the new regulation, investors have not been sure of which structure a hedge fund will adopt and whether the adopted structure will be compatible with their existing structure,” Visagie said.

Novare has recently announced the findings of its 13^th annual Hedge Fund Survey, which found that managers preferred the flexibility of QIHFs and would like to be able to take investment opportunities as they arise without having the compliance restrictions such 200% gross exposure, monthly dealing etc. as in RIHFs. 

Interesting highlights that arose from the survey was the fact that the first daily dealing hedge fund (under the new regulation) was launched and a migration towards lower fees with higher hurdle rates was noted - both trends are unfolding in a time where the industry is embracing the retail market, realising the needed change.

One of the requirement under the new regulation is for a hedge fund to appoint a management company (Manco) for all administrative, operational and risk monitoring duties and for the appointed Manco to be approved by the FSB. 

The introduction of the Manco as an integral part of operating a hedge fund relieves the operational risks historically implicit with hedge funds.

According to Visagie the industry has grown in leaps and bounds over the years, with operational sophistication and efficiency being at the forefront. 

“The FSB has worked tirelessly during the implementation phase, having approved Mancos on different schemes and with different product offerings on an ongoing basis – this is not a small feat and the role it has played deserves applause,” he said.

 The new regulation is a step in the right direction, and yet another confirmation that this industry is here to stay. 

“The implementation phase of the hedge fund regulation has started. The industry is transitioning, as observed in the survey results, and funds are adopting the different legal structures as per the regulations and launching new products,” Visagie said. 

The survey, published for the first time in 2004 by Novare, combines findings from a total of 53 asset managers, collectively managing over 106 uniquely mandated hedge funds.