The South African hedge fund industry is expected to experience growth spurt now that investors have access to regulated products, Robert Foster, Convenor of the ASISA Hedge Funds Standing Committee, has said.

The 2015 statistics for the local hedge fund industry show that the industry has enjoyed a steady growth in assets in recent years after retirement funds were allowed to invest a portion of their assets in hedge funds in 2011.

The South African hedge fund industry grew its assets under management by R5.1bn in the 12 months to December 31, 2015, ending the year with assets of R62.1bn, according to the Association for Savings and Investment South Africa (ASISA).

In April last year South Africa became the first country to put in place comprehensive regulation for hedge fund products.

Since hedge funds now fall under the Collective Investment Schemes Control Act (CISCA), they are deemed regulated collective investment schemes, just like unit trust portfolios.

The first two hedge fund management companies and their funds, representing about 70% of the industry’s assets under management, were approved by the Financial Services Board (FSB) in December 2015.

The new regulations provide for two categories of hedge funds, namely Qualified Investor Hedge Funds and Retail Investor Hedge Funds.

Retail Investor Hedge Funds are designed for more risk averse investors, operating in a similar manner to unit trust funds.

Foster said while the regulation of hedge fund products is new, hedge fund managers in South Africa have been regulated for a number of years and must comply with the Category IIA license requirements of the FAIS Act before they can manage investors’ funds.

According to Foster, the 10 largest hedge fund managers in South Africa manage 71% of the hedge fund industry’s total assets under management.

“This means that the bulk of hedge fund assets are invested in sizeable portfolios managed by well-established hedge fund asset managers with a consistent track record of success,” he said.

Hedge funds apply a number of different strategies to mitigate the impact of market volatility.

The most common hedge fund strategy in South Africa is referred to as “equity long/short”.

At the end of December 2015, some 61% of hedge fund assets were invested in this type of strategy.

Foster said that hedge funds are designed to outperform the markets during times of extreme volatility as experienced last year.

“However, when financial markets deliver strong performances hedge funds are unlikely to shoot the lights out,” he added.