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High net worth individuals are key to SA funds

Africa Global Funds
Jan. 21, 2015, midnight
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Word count: 739

High net worth individuals will be key driver for small and new South African funds going forward, according to some of the participants at the latest Opalesque South Africa Roundtable.

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High net worth individuals will be key driver for small and new South African funds going forward, according to some of the participants at the latest Opalesque South Africa Roundtable.

Pieter Viljoen, CIO at Edge Capital, said it has become more onerous for new managers to set up business in South Africa, from an operational and an industry perspective.

Indeed, over the past couple of years, he explained, most of the growth in the local industry has been asset growth and there has not been much of it, making it very difficult for new talent to raise any asset.

"A lot of the new funds that we have seen are either very small funds who want to get recognized as a hedge fund or as a fund prior to regulation, or players repositioning and restructuring their legal structure," said Genene Carse, Business Implementation Manager at IDS Fund Services, an administrator with broad capabilities across a wide product offering that spreads from collective investment schemes, securities, long-only, to private equity and hedge funds.

Tony Christien, Deputy CEO at IDS, added that Edge Capital was one of the first funds of funds that seeded new fund managers a few years ago, as it is large enough to do that. However, a manager with no one to turn to will find it hard to launch.

"With regard to the regulations that are currently finalized," he noted, "it was also extremely important that high net worth individuals retain their capability of investing into newer funds, because traditionally that is not what your typical institutional pension fund would do, they don’t receive new businesses concepts easily. It is generally the high net worth (HNW) guys who take their chance with somebody new. The issue is that unless we maintain that capacity to get new people coming to market, then the industry itself can only stagnate in the long-term."

New regulations are underway in South Africa. All current South African hedge funds will fall under the Collective Investment Schemes Control Act (CISCA) and become qualified investor funds (QIFs) once the draft regulations become effective, and the funds are declared as being under CISCA by the Minister of Finance. This should happen by 1 April 2015. Fund managers can then also change a QIF into a retail fund or launch new Retail Investor Hedge Funds (RIHF, similar to a UCITS) and freely solicit from the public. Investment advisers and wealth managers have already expressed an interest in the new breed of hedge funds.

As far as small and new managers are concerned, there is also a slight peculiarity here at play, Viljoen said. If, globally, the HNWIs and the family offices created hedge funds, it is not the case in South Africa, where institutions invested first.

However, he believes the HNW market will be key in the market for small and new and new managers, as they will be looking for niche opportunities.

"We must also accept that our market is relatively small," he added, "so the opportunity for a lot of new managers and strategies is limited purely from a market dynamic perspective."

The deeper issue regarding new products and innovation in the alternative space, said Carse, is that the regulators regulate what they know, and new products are in the unknown. The challenge in an increasingly regulated world will be how do to keep the dynamics of the industry and the innovation going within that regulated space.

Discussions around the fund tax issue seem to say that most of the investors in qualified funds are institutionals and so won't be paying taxes and that the HNWIs will do so, commented Andy Pfaf, Commodities Fund Manager at MitonOptimal Group. However, the latter are the ones that are needed to seed start-ups and new ideas. "So we want to be careful that those investors don’t get painted out of the picture accidentally."

The majority of inflows go to large funds, globally and in South Africa, said Simone Blanckenberg, Head of Strategy and Product Development at Tantalum Capital, and this results in less fund launches and smaller managers staying small.

In South Africa, "The small guys who launched three or four years ago with R50 million hoping that they would get the support of the fund of funds, multi-managers, institutions or consultants, this hasn’t really come to fruition across the board." Even if in theory, it is more interesting to invest in small managers, this kind of allocation (or reallocation) decision is difficult to make due to the perceived risk.

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