2009, so far, has been a much better place for the local alternative investments industry than a year ago. Market volatility has subsided somewhat, offering some opportunity to make up for the tumultuous period faced in 2008.
The last few months have witnessed the local hedge fund industry being mobilised to get involved and have a say in the direction that the industry is taking, especially in the light of more regulations called for globally. This process started with local funds of hedge funds getting together to discuss optimal ways to represent the hedge fund industry going forward, leading to a joint initiative between ASISA (the Association for Savings and Investment South Africa) and AIMA SA. The ultimate goal is to engage pro-actively with the Regulator on issues impacting the alternative investments industry. The joint hedge fund representative bodies have already held a successful meeting with the FSB in April and workshops with hedge fund industry participants to set the roadmap towards product regulation.
To date, the local hedge fund industry has been characterised by a high level of self-regulation, but the majority view is of a more formally regulated product structure that would benefit the local industry and boost inflows from would-be investors. The newly elected AIMA SA Board has undertaken to uplift the profile of alternative investments in a South African context. Among these initiatives has been regular contact with the media and an overall more transparent attitude.
South Africa is being positioned as a prime investment destination and there are many factors counting in our favour :
- A sophisticated financial system – we are the economic powerhouse of the African continent, with well-developed and efficient markets (for example, the ease of short selling – for many other African exchanges short selling cannot be accommodated);
- Prudent regulations to maintain market stability – the Johannesburg Stock Exchange has never allowed naked short selling and as a result, when many global exchanges put short selling restrictions in place last year in an effort to curb market volatility (read chaos), the JSE decided not to place similar restrictions locally;
- Institutional focus – a large proportion of local hedge funds are being managed by fund managers that used to manage portfolios at large asset management institutions for institutional investors. There thus tends to be quite an “institutional mindset” or approach by these managers, probably one of the reasons for the high level of self-regulation, with standards of operational proficiency and reporting further promulgated by the funds of funds community. Funds of hedge funds are still the preferred entry point for local pension fund and other institutional investors to alternative assets;
- Even though “hedge funds” as a product are currently still unregulated (however, most of the fund of funds products are offered through the heavily regulated life insurance industry), local hedge fund managers are now regulated – the FSB has a separate Category IIA licence under existing FAIS regulation that holds hedge fund managers to more rigorous standards as far as experience, qualifications and financial soundness (amongst others) go. This is certainly a groundbreaking step, putting South Africa firmly ahead of the global regulatory curve.
The alternative investments industry will continue to be subjected to rigorous regulatory scrutiny. This is, however, an opportunity for investors to step up due diligence practices, revisit the fine print in investor memorandums and management agreements, understand the implications of the “terms & conditions” such as performance fee crystallisation, lock-ups, redemption terms; but, above all, ensure that you understand what you’re investing in and what the risks involved are.