New regulations for the South African hedge fund industry means change for all hedge funds and market participants. That’s the word from Andrew Bovell, Solutions Specialist, RisCura. “The amendments will ensure stricter regulation, tighter control and greater transparency of the industry, further strengthening the strong ‘self-regulatory’ framework that was in place since 2006.”
Bovell says a key change will be opening up the hedge fund industry to the retail market, where it is currently exclusively available to high net worth or qualified expert investors. “With this will come increased risk monitoring, the need for mandate compliance, regulatory reporting as well as operational changes to funds.
“I do perceive this change to be a step in the right direction from the Financial Services Board (FSB), following the regulation of hedge fund managers since 2007 in terms of the FAIS Act, with the possible benefit of increased flows into a relatively small industry.”
Investors’ funds will be better protected following the new regulations. That’s according to Alisha Naidoo, Investment Analytics, Business and Product Development Manager, RisCura. “Currently hedge fund managers are regulated as a Category 2A licence holder under the FAIS Act, which requires managers to comply with the Fit and Proper Requirements which include honesty, integrity and competency,” says Naidoo.
“However, there is no regulation of the fund itself. This is where the new regulation comes into play requiring that funds must establish and enforce a risk management policy that includes the monitoring of a variety of risk measures as well as stress testing and an independent risk management function.”
Naidoo adds that it is stipulated in the new regulations that position data and various other reporting requirements be made available to the FSB on a monthly basis for retail funds and a quarterly basis for qualified investors. “Given the more stringent requirements and transparency, it would stand to reason that investors will be better protected.”
Internationally, there is no uniform regulation, Bovell says.
“South Africa has made it clear that either you qualify as a QIHF (Qualified Investor Hedge Fund) or a RIHF (Retail Investor Hedge Fund) with RIHF products being subjected to slightly stricter regulatory requirements.”
He adds that currently, European Hedge Funds have the option to comply with the Undertakings for Collective Investments In Transferable Securities (UCITS) or Alternative Investment Fund Managers Directive (AIFMD) which provide a regularity framework for funds.
In the US there is no such retail offering in this space, with a minimum investment only offered to “accredited investors” or individuals with a minimum net worth of USD $1 million.
“One could therefore say that South Africa’s FSB has started paving the way for retail investments in Hedge Funds through stricter regulation in a previously unregulated expensive capital environment,” Bovell says.
Naidoo points out that without doubt, the secrecy name tag given to the hedge fund industry can be largely attributed to the lack of understanding from the general market, as well as a bad reputation given to the industry from foreign markets.
“South African hedge fund managers do send out performance and risk level information to investors either daily or on a monthly basis which is ahead of the trend compared to their global counterparts, as well as the local CIS industry which currently only discloses holdings level data quarterly.
“Going forward based on new regulation managers will need to disclose holdings level data as well as other reporting requirements to the FSB which will go a long way to improving transparency.”
Looking ahead Bovell says that with any type of change to an established industry, there is always a sense of timidity.
“This can actively be seen in the market, as established houses iron out exactly what is expected of them, from the regulation as well as which approach they would like to take going forward.”
Naidoo adds that it may take time to see significant inflows due to the reputation hedge funds have in the general market of being very risky.
“There is still a long way to go in improving education in this area and only once financial advisors are sufficiently informed and are on board would I then expect to see the retail market start to grow.”