During these volatile market periods, it can be hard for investors to stay the course and not have a knee-jerk reaction when markets are going against you. To be able to sleep better at night, it may be wise for investors to reconsider hedge funds within their portfolio mix. The South African market is down -6.9% year-to-date 30 September 2022, and investors need to consider alternative uncorrelated investments to protect their wealth.
South African hedge funds are some of the most regulated and transparent in the world and, fortunately, hedge fund managers in South Africa have proven themselves to be more conservative than their international counterparts – there are several experienced SA hedge managers, including Laurium Capital, that have 10- to 20-year consistent track records to prove it.
Hedge funds are obviously not without risk, and it is very important how this risk is managed. Risks, like liquidity, leverage limitations and net equity positioning, are all regulated and integrated into the portfolio risk management daily. Reporting has significantly improved with the regulation of hedge funds. Governed by CISCA, hedge funds are required to report fact sheets, total expense ratios and positioning. A concerted shift has been made by the SA hedge fund industry to meet investors’ requests for more information.
The hedge fund industry remains small but has grown to over R100bn (from R73bn according to the 2020 HedgeNewsAfrica report). If this remains the case, the question we posed last year remains relevant: how does one access hedge funds… where is the door? The combination of strong performance, improved regulation, and improved understanding of hedge funds is driving increased demand in South Africa currently.
Board Notice 90 still limits unit trusts in making any investment into a hedge fund. The industry remains hopeful that this will be amended in the much-anticipated revamp of Board Notice 90. If this remains the case, the question we posed last year was: how does one access hedge funds… where is the door?
The inclusion of hedge funds for financial advisors can either be done directly into the fund or via a model or wrap fund. Going direct can be quite onerous for retail investors, given the minimum investment requirements and the choice of funds. A better solution would be gaining access to a pre-approved select list of funds via the LISP platforms. This provides comfort to allocators that the hedge funds have passed due diligence processes and carry the LISPs approval.
They can then make a choice of the hedge fund strategy they require and split their allocation across a few funds. Although unlimited for discretionary investors, Regulation 28 limits single manager hedge funds allocations to 2.5% and fund of funds to 5%. With recently announced amendments to Regulation 28, the overall hedge limit of 10% is no longer shared with other alternative asset classes. An allocator could now split fund their allocation to hedge across four different funds equally, totalling 10%, and still look to invest in private equity, infrastructure, and other alternatives in addition to hedge if they choose.
The door to hedge funds has been opened with several LISPs offering a selection of approved established hedge funds on their platforms. The LISPs have answered the call of additional demand for hedge funds, allocating the research time, and adding their preferred funds to their platforms.
If you are interested in adding a great diversifier to your portfolios, offering equity like net returns at lower volatility or elevated returns at market-like volatility, then please contact your preferred LISP consultants to access our hedge funds. Our Laurium Long Short RI Prescient Fund and Laurium Market Neutral RI Prescient Fund Funds are both daily priced with daily liquidity, while our Laurium Aggressive Long Short QI Prescient Fund is monthly dealt.
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