This year marks a significant milestone for the South African investment industry: a decade of regulated hedge funds. In April 2015, South Africa became the first country globally to implement comprehensive hedge fund regulations, integrating them into the framework of the Collective Investment Schemes Control Act (CISCA). This move brought hedge funds into the same regulatory framework as traditional unit trusts, ensuring transparency in fees, performance history, and risk profiles. By demystifying hedge funds, these regulations have opened the door for a broader range of investors while reinforcing regulatory oversight. While hedge fund CIS products have only been available for the past decade, 36ONE Asset Management has been managing hedge fund strategies for nearly 20 years.
So, one might ask, what is the unique appeal of hedge funds?
Unlike traditional unit trusts, hedge funds offer managers greater flexibility in their investment approach. They can use a range of strategies designed to enhance returns and manage risk in both rising and falling markets. One of their most powerful tools is short selling, which allows investors to profit from declining stock prices. This adaptability makes hedge funds particularly attractive to investors seeking capital preservation, consistent returns, and effective portfolio diversification. Where most unit trusts aim to outperform a benchmark, our 36ONE hedge funds focus on delivering absolute returns, aiming to generate positive performance regardless of broader market conditions. For more information on the fundamentals of our 36ONE hedge funds, read our previous article here.
The protection that a hedge fund offers comes at a cost, meaning that the hedge fund strategy typically underperforms in strong bull markets, but significantly outperforms in bear markets. In addition, the hedge fund strategy is most likely to outperform the market when capital distortions are at their most extreme. The chart below highlights the ability of our hedge fund to provide downside protection, while capturing the upside.
How has the hedge fund landscape changed?
Over the past decade, hedge funds have solidified their position within South Africa’s investment landscape. Their ability to navigate market volatility has made them an essential component of diversified portfolios, particularly during economic downturns and persistent volatility.
Hedge funds are becoming increasingly popular among retail investors due to their potential to generate returns even in declining markets. The latest statistics from the Association for Savings and Investment South Africa (ASISA) underscore the growing appeal of hedge funds. In the 12 months leading up to 31 December 2024, South African hedge funds recorded net inflows of R13.31 billion, more than double the R6.24 billion recorded in 2023. This highlights the increasing confidence in the asset class and its ability to generate risk-adjusted returns.
Are hedge funds becoming more accessible?
Hedge fund accessibility has improved significantly over the past decade. Unlike the US, South Africa explicitly allows retail investors to access hedge funds via Retail Investor Hedge Funds (RIHFs) under CISCA. The introduction of RIHFs has provided individual investors with access to sophisticated investment strategies that were previously reserved for high-net-worth individuals and institutional clients. While Qualified Investor Hedge Funds (QIHFs) require a minimum investment of R1 million, RIHFs offer a more accessible entry point for everyday investors. Additionally, RIHFs are subject to stricter investment and risk limitations.
When the hedge fund regulations were introduced, most funds defaulted to the qualified investor category. However, over time, funds began consolidating. Retail funds are slowly starting to win back traction which 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. This shift aligns with the industry’s long-standing call for increased accessibility and transparency.
What does the future hold for hedge funds in South Africa?
Looking back at the past decade, it’s clear that South Africa’s hedge fund industry has come a long way. As with any investment forecast, understanding the future starts with analysing the past. By the end of 2024, the South African hedge fund industry managed a record R185 billion in assets – an impressive figure but still representing less than 5% of total collective investment scheme (CIS) assets. This indicates substantial room for further expansion, particularly if regulatory and structural challenges can be addressed. Increased attention on hedge funds, track record as collective investment schemes and stellar consistent performance will hopefully encourage further investment.
Looking ahead, three key things required for the continued success of South Africa’s hedge fund industry include enhanced investor education, regulatory clarity, and a deeper understanding of the role hedge funds play in achieving long-term financial objectives. With record inflows and an evolving market landscape, the future appears promising for hedge funds in South Africa. As investors increasingly seek alternative asset classes to navigate market uncertainty, hedge funds are well-positioned to deliver superior risk-adjusted returns while managing downside risk effectively.
Our 36ONE hedge funds are available via our Manco and via certain LISP platforms. For more information, please feel free to contact us.