South African hedge fund boom

South Africa’s hedge fund industry experienced record-breaking investment growth and saw double-digit net inflows for the first time in 2024.

This was revealed by the Association for Savings and Investment South Africa (ASISA), which released its annual hedge fund statistics at the beginning of March. 

It revealed that assets under management grew by 34% to R185.12 billion over the 12 months to the end of December 2024. 

These assets were invested in 221 hedge funds managed by 12 management companies. South African hedge funds attracted strong net inflows of R13.31 billion in the 12 months to 31 December 2024. 

ASISA’s Hayden Reinders pointed out that net inflows more than doubled from 2023, when net inflows came in at R6.24 billion. Net inflows in 2022 amounted to R4.54 billion.

According to Reinders, retail investors again contributed most of the net inflows in 2024, despite hedge funds being seen as an asset class reserved for the wealthy. 

“This is a strong vote of confidence from retail investors who recognise the important role of regulated hedge funds in mitigating market volatility within an investment portfolio,” he said.  

“Our industry is celebrating 10 years of hedge funds being a regulated investment product, and it is good to see retail investors increasingly trusting hedge funds as valuable building blocks alongside unit trust funds.”

In 2015, South Africa became the first country in the world to implement comprehensive regulation for hedge fund products. 

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

Retail Hedge Funds are strictly regulated in terms of the investments and risks that they are allowed to take. They are open to all investors with a minimum lump sum investment amount of R50,000.

Qualified Investor Hedge Funds require a minimum investment of R1 million. They are open to investors with a solid understanding of hedge funds’ investment strategies and associated risks.

Hedge funds, like unit trust portfolios, are regulated collective investment schemes under the Collective Investment Schemes Control Act.

Reinders explained that strong investment performance from hedge funds, combined with marketing campaigns aimed at demystifying hedge funds and ease of access, has drawn individuals towards these funds.

South African Retail Hedge Funds attracted net inflows of R11.84 billion in 2024, while South African Qualified Investor Hedge Funds recorded net outflows of R70 million.

Hedge funds in South Africa are classified according to their investment strategies – long-short equity, multi-strategy, fixed income, and others.

Reinders said South Africa-focused long-short equity hedge funds were most popular with retail and qualified investors in 2024. 

These retail funds attracted net inflows of R6.16 billion, while their qualified counterparts attracted R479.01 million. 

This type of hedge fund predominantly generates its returns by pairing long positions on equities with short selling to benefit from both rises and drops in market prices.

South African multi-strategy hedge funds came in second, attracting retail net inflows of R3.96 billion and qualified money of R7.21 million. 

Multi-strategy hedge funds are portfolios that do not rely on a single asset class to generate investment opportunities but instead blend various strategies and asset classes with no single asset class dominating over time.

Fixed-income hedge funds attracted net inflows of R1.72 billion. These portfolios invest in instruments and derivatives sensitive to movements in the interest rate market. 

Reinders noted that flows into qualified investor hedge funds will likely remain muted until the National Treasury finalises its review of the tax treatment of collective investment schemes.

“The review will also provide much-needed tax clarity for our industry, hopefully enabling the Financial Sector Conduct Authority to dust off its review of Board Notice 90,” Reinders said. 

“In its current form, BN90 prevents long-only unit trust portfolios from investing in hedge funds even though they are also regulated as collective investment schemes.”

He said the increased attention on hedge funds, their track record and stellar consistent performance will encourage local pension funds to take up the full 10% asset allocation into hedge funds.