South Africa's hedge funds in optimistic mood

The South African hedge fund industry proved its resilience in the equity market rally of late 2009 and then in the volatile months of 2010, managing to preserve capital and produce strong cash-beating positive returns. Now, despite the expectation of further volatility in 2011, the industry is gearing up for further growth following significant changes on the regulatory front.

Draft changes introduced in December to the Pension Funds Act increase exposure to alternative investments that pension funds can consider when constructing portfolios.

According to the new draft up to 10% of a pension fund's assets can be invested in hedge funds, which is good news for the industry as SA is one of the twelve largest pension markets in the world and local pension funds have more than R1 trillion in assets.

"If more pension funds make use of the opportunity to increase their exposure to hedge funds, the industry has scope for significant growth and could potentially double in size," says Carla de Waal, portfolio manager at Novare Investments in Cape Town. "South Africa's hedge fund industry faces an exciting period of opportunity."

South African hedge funds operate under the 'big umbrella' of Asisa, the SA savings and investment industry body. There are just over 100 registered hedge fund companies and assets under management have grown 8% to R32.1bn this year.

"By and large South African hedge funds have performed much better than the offshore hedge funds," says James Gilfillan, Chief Investment Officer at Alpha Asset Management in Cape Town, "The local industry is robust, skilled and transparent and offers a very attractive proposition for foreign investors."

One upshot of the possible win-win situation of more interest from local pension funds and foreign investors is that staff levels are predicted to increase in the sector.

"As a result of regulatory changes we can expect an increase in the number of hedge funds and people employed by managers over the next couple of years," says de Waal. "With formal recognition given to alternative investments in the most recent regulatory developments, we expect that more people previously employed in the traditional long-only investment space might join hedge fund companies."

Recent consolidation in the local industry has resulted in larger companies with more AUM and more diverse range of products. "These larger companies should continue to attract and nurture new talent, which might lead to new hedge fund management companies being set up in future once the necessary hedge fund experience has been gained. Some skilled investments professionals might prefer to run their own businesses."

At present there are around 100 managers working in teams of 3 or 4 in South Africa, a small pool which has the potential to grow significantly. "New funds are always being developed, so the talent pool and the environment for seeding is good, there is plenty of skill out there," says Gilfillan. "So if the question is, is there a universe that is attractive? I think so. Could it grow a lot? I think so. Are there lots of new potential managers? Definitely."