Hedge Funds are classified as Collective Investments Schemes in South Africa. They are an arrangement in pursuance of which members of the public are invited or permitted to invest money or other assets, which uses any strategy or takes any position. This could result in the arrangement incurring losses greater than its aggregate market value at any point in time and which strategies or positions include but are not limited to leverage or short positions.
What is their purpose?
Hedge Fund’s purpose is to increase investor returns while reducing risk, regardless of whether the market rises or falls. Hedge Funds make use of countless strategies to achieve these goals, such as:
a) Long/short Equity Fund;
b) Market Neutral Fund;
c) Multi-Strategy;
d) Fixed Income Arbitrage; or
e) Funds of Funds.
How many Hedge Funds are there in South Africa?
To date the Financial Sector Conduct Authority regulates 13 local hedge funds management companies, which combined manage more than 200 portfolios.
Who invests in Hedge Funds?
Members of the public are invited or permitted to invest money or other assets. There are two types of investors: retail and qualified investors.
Retail Investor
Any investor may invest as per the requirements set out by the FSCA.
Qualified Investor
Any person who invests a minimum of R1 million per hedge fund and who has demonstrable knowledge and experience in financial and business matters (ability to assess the merits and risks of a hedge fund); or has appointed a Financial Services Provider (FSP) who has demonstrable knowledge and experience to advise on the merits and risks of a hedge fund.
Who benefits from Hedge Funds?
Members of the public who invests in hedge funds may benefit from these products. However, they must consider the risks associated with these products such as the huge potential for money loss. Below are some of the benefits of investing in hedge funds:
• Hedge funds can take advantage of both rising and falling financial markets.
• Hedge fund managers have more investment tools at their disposal to enhance returns.
• Hedge funds can assist in capital protection and diversification.
What is the FSCA’s role in connection to Hedge Funds?
The role of the FSCA is to regulate and supervise hedge funds managers with the aims to –
(a) provide for the protection of investors in hedge funds;
(b) assist in the monitoring and management of systemic risk;
(c) promote the integrity of the hedge fund industry;
(d) enhance transparency in the hedge fund industry; and
(e) promote financial market development.
What is one interesting fact that we need to know about Hedge Funds?
Hedge funds are different from conventional funds in that they can borrow money to make larger investments, use derivatives and engage in short selling. Although this makes them risky investments, it allows them to profit even when the market is performing well through long positions and profit through short selling when the financial markets are not performing well.
