South African hedge funds are rocking

South African hedge funds are showing strong growth. They attracted record net inflows of R6.24 billion in 2023 and grew their assets under management to R137.9 billion.

These assets are invested in 213 hedge funds, managed by 11 hedge fund management companies.

The industry recorded healthy net inflows for the second consecutive year. Net inflows in 2022 amounted to R4.54 billion.

This was revealed in the Association for Savings and Investment South Africa’s (ASISA’s) annual analysis of the state of the industry.

ASISA said South Africa’s hedge fund industry is in good health, partly due to reforms to the country’s regulatory treatment of hedge funds.

Unlike many other markets, the retail investor plays a significant role in the growth of the South African market.

In South Africa, retail hedge funds are strictly regulated regarding their investments and the risks they can take.

These funds are open to all investors who can afford the average minimum lump sum investment amount of R50,000.

This still makes the average South African hedge fund much more accessible than its counterpart in many parts of the world.

A second class of hedge funds, Qualified Investor Hedge Funds, requires a minimum investment of R1 million. 

They are open to investors with a solid understanding of the investment strategies deployed by hedge funds and the associated risks. 

Hedge funds fall under the Collective Investment Schemes Control Act (CISCA) and are deemed regulated collective investment portfolios.

Hayden Reinders, convenor of the ASISA Hedge Funds Standing Committee, provided further information on the local hedge fund industry.

He said 32% of assets under management were held by retail hedge funds at the end of December 2023, while qualified investor hedge funds held 68% of assets.

However, the net inflows in 2023 were driven predominantly by retail funds, which attracted net inflows of R5.1 billion.

In comparison, South African qualified investor hedge funds recorded net outflows of R1.1 billion.

Reinders said there is a growing awareness among retail investors that hedge funds are not high-risk alternatives to unit trust funds.

“Hedge funds are one of the building blocks of a well-diversified investment portfolio to reduce market volatility,” he said.

“This hopefully indicates that hedge funds in South Africa are increasingly being accepted as an important investment tool in mitigating market volatility.”

Retail hedge funds in South Africa have also become more accessible to retail investors in recent years as investment platforms are willing to offer them to investors.

In addition to increased marketing initiatives by some of the bigger hedge fund managers, solid performance has also resulted in greater interest from retail investors. 

Net inflows showed South African multi-strategy hedge funds were most popular with retail and qualified investors in 2023.

Multi-strategy hedge funds do not rely on a single asset class to generate investment opportunities.

Instead, they blend various strategies and asset classes with no single asset class dominating over time.

This is the first time in at least five years that South African retail multi-strategy hedge funds outdid retail long/short equity hedge funds in popularity.

They attracted R2.27 billion in net inflows in 2023, while long/short equity funds recorded R2.13 billion.