High net worth South Africans have increased their allocation to hedge funds from 14.1% in 2014 to 26.4% in 2015, according to an annual hedge funds survey by Novare Investments.

Eugene Visagie, Head of Hedge Fund Investments at Novare, said: “In our opinion there is a greater awareness of hedge funds and due to increased market volatility investors see this as a more prudent way to extract alpha from the market.”

The principal allocators of capital to the hedge fund industry remained funds of hedge funds (FoHFs), which allocated 57.3% of industry capital - a decrease of 4.37% in the allocation made last year.

“FOHFs did not decrease their allocations it was due to most of the inflows coming from other type of investors,” Visagie told Africa Global Funds.

Meanwhile, there was a sharp drop in allocation from pension funds, which had an allocation of 8.4% in 2014 versus only 0.1% by June 2015.

“This was mainly driven by the large fund which was dissolved with an investor base made up mainly of pension funds,” Cape Town-based Novare said in its 12th survey.

“The fund accounted for 80% of the assets of total dissolved funds [during the period, a total of six funds were dissolved]. Owing to the small size of the local industry, when a large fund closes, the impact is much more evident, altering the composition and distribution of industry assets,” the company said.

Highly anticipated hedge fund regulation was released in February 2015 as a separate pillar under the Collective Investments Schemes Control Act (CISCA), which encompasses unit trusts.

“This will take some time to play out but we are of the opinion that due to the regulated product offering and the current market environment both retail and institutional investors cannot afford to exclude an allocation to hedge fund in a balanced portfolio,” said Visagie.

The survey revealed that the number of new funds launched increased despite the relatively muted environment for new strategies over the last five years.

In the period under review, 16 of the new funds were launched by 14 different asset managers.

Assets under management by the South African hedge fund industry reached R62bn ($4.55bn) on June 30, 2015, showing a 15.8% increase from the previous year.

The surge in assets can largely be attributed to performance during the 12-month period.

According to the results, equity long/short remained the favored strategy with total assets up marginally from 59.9% in 2014 to 60.9% in 2015, representing R37.8bn ($2.77bn) of total assets.

During the last few years the equity long/short strategy has received the bulk of capital inflows.

It also had substantial net inflows over the reviewed period of R2.1bn (excluding dissolved funds).

“The fixed income strategy rebounded in 2015 after contracting in size by 4.1% in 2014. It regained 2.5% of total hedge funds’ assets in last 12 months under review to represent 14.1% of assets,” Novare said.

“Despite the percentage decline of total assets over the last four years, there has been a pick-up in equity market neutral strategies, which increased from 7.1% to 8.7% of industry assets.”

The survey also revealed that most participants outperformed the local equity and bond markets.

As such, the average compound return of the equity long/short strategy was 14.7% in the year, while the FTSE/JSE All Share Index gained 3.7%.

The largest funds, those with more than R1bn, posted the best average return at 13.8%.

Visagie said: “At Novare we are very positive and see great opportunity for hedge funds both at institutional and retail market but are very cognizant that a large amount of education still need to take place to really tap into these investors.”

This year a total of 53 asset managers, collectively managing over 111 uniquely mandated hedge funds, were surveyed.