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South African Hedge Funds – the proverbial phoenix

Insight 25 March 2022

South African Hedge Funds – the proverbial phoenix

A culmination of global events, natural and political of nature, resulted in severe pressure on investors and traditional unit trust (“long-only”) investment managers alike. This pressure resulted in below-average growth in the assets under management (AUM) of the long-only industry.

At the same time, performance of the long-only industry was hampered by underperforming investments because of natural disasters, such as the COVID-19 pandemic, the 2020 Russian-Saudi oil price war, and the recent Russian invasion of Ukraine.

With more information readily available to the general public than ever before, investors are starting to question the norm and explore alternative investment opportunities. Alternatives provide investment opportunities in both private funds (which require a lockup period of up to ten years) as well as open-ended funds which, in South Africa, are known as Collective Investment Schemes (“CIS”) in Hedge Funds.

The Hungarian-born American billionaire investor and philanthropist, George Soros, famously known as “The Man Who Broke the Bank of England" because of his short sale of US$10 billion worth of pounds sterling, during the 1992 Black Wednesday UK currency crisis, once summarised his practical skills in one word: survival. He continued by stating that operating a hedge fund utilised his training in survival to the fullest.

While hedge funds have been greatly misunderstood in the past, one perception has always stood out - when the stock market is performing poorly, talk of using hedge funds tends to increase. The very nature of hedge funds is to produce superior risk-adjusted returns, regardless of market conditions. Hedge funds can take speculative positions in derivative securities and can short sell stocks. This will typically increase the leverage and, as such, the risk of the fund. This also means that hedge funds can generate positive returns when the market is underperforming.

In a recent media release, the Association for Savings and Investments South Africa (“ASISA”) indicated a growth of R13.66 billion in AUM in the South African hedge fund industry for 2021. Taking the total size of the industry to an all-time high of almost R87 billion in AUM, 2021 represented a third consecutive year of growth in AUM.

With the ability to utilise leveraged finance and short selling, hedge fund managers have not only been able to survive, but successfully navigate the volatile economy, caused by geopolitical and natural disasters, far better than their long-only counterparts and, thereby, not only protect their investors’ wealth but also grow it.

This advantage is clearly seen when scrutinising performance and growth for the past three years:

Movement in AUM v Performance - SA Hedge March 2022

Per the HedgeNews Africa return data, not only have hedge fund managers succeeded in generating positive performance, but they were also able to improve performance over the past 3 years.

Additionally, with the introduction of the concept of Retail Hedge Funds in 2015, hedge funds are no longer exclusively available to high net worth individuals, but also to the average man on the street, expanding the opportunity set for retail investors to gain exposure to alternative investment opportunities.”

Werner Gerber
Director, Alternative Asset Services

To fully utilise their advantage over their long-only counterparts, it is critical for hedge fund managers to (1) limit their focus on managing portfolios, (2) act promptly to ever-changing global markets and regulations, and (3) have access to accurate information when needed. It is therefore imperative for managers to partner with reputable service providers.

How can Sanne help?

With a 20-year track record in the South African hedge fund industry, a proven solution trusted by managers and investors across the world, a strong local and global knowledge base, and a team of 130 local specialists, Sanne is perfectly suited to assist hedge fund managers in an ever-evolving environment.

As a global service provider, our team of hedge experts provides you with full coverage of your middle-office, hedge fund accounting, investor servicing, and regulatory reporting requirements regardless of the time zone where your investment management operations or investors are based.

Our commitment to our clients is evident in the recent success of funds administered by Sanne at the HedgeNews Africa Awards, where 5 of the 13 categories were won by funds administered by Sanne.

For additional information, or to discuss any of the topics highlighted above, please get in touch with Werner  or Alan directly.

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Alan Keet Head of Sanne, South Africa - South Africa
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Werner Gerber Director, Alternative Asset Services - South Africa
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