Hedge Funds FAQ’s
You are welcome to send us your questions to add to the list.
Regulation
Since 2015, South African Hedge Funds have been regulated under the Collective Investment Schemes Control Act (CISCA). The regulation differs depending on the classification of the Hedge Fund, however both Qualified and Retail Investor Hedge Funds provide sufficient investor protection.
Qualified Investor Hedge Fund
A minimum investment of R1 million is required per hedge fund, as well as demonstrable investment knowledge by either the investor or his appointed Financial Services Provider.
Retail Investor Hedge Fund
Investments may be accepted from any investor, with no prescribed minimum. Standardised risk parameters are enforced to protect retail investors.
Hedge funds in a nutshell
Similar to traditional unit trusts, investors’ money is pooled and used to buy assets such as cash, bonds, property and equities. Hedge funds however, have greater flexibility in the instruments and strategies used to create a diversified portfolio, a typical characteristic is the use of short selling and leverage to reduce market correlation.
Are all hedge funds aggressive?
Although the risk and return profiles of hedge funds are greatly dispersed, the typical South African Hedge fund is managed very conservatively, usually seeking to provide positive returns in all market conditions, usually emphasising consistency of returns or protection of investors’ capital.
Benefit of combining hedge funds in a Collective Investment Scheme structure
As hedge fund strategies are extremely diverse in style and outcome, no one single-strategy hedge fund is able to fully harness the opportunity set these alternative investments are able to bring to an investor’s portfolio. Through expert selection and combination of underlying funds a Fund of Hedge Funds manager can create a diversified portfolio specifically constructed to satisfy the risk and return appetite of its client base. Furthermore, within a Fund of Funds Collective Investment Scheme, an underlying investment rebalancing or manager substitution does not trigger a capital gains tax event for the investor.
What is the benefit of hedge funds in a portfolio?
Hedge funds can be used in portfolios to reduce risk relative to equities in the same way as bonds in a traditional portfolio A good combination of hedge funds can compete well with bonds on volatility measures, and outshine bonds on returns.
Hedge Funds typically sacrifice some upside in favour of more consistent positive returns This may be an argument of some equity investors to exclude these from their portfolio However, this can be to the detriment of such an investor in equity down markets since hedge funds can use shorting as an uncorrelated alternative source of return. The combination of uncorrelated sources of return can result in the overall portfolio delivering more consistent returns in a variety of market conditions and outperformance over the entire period.
What is Shorting?
Shorting is a mechanism used to express a bearish view, the expectation that the price will decline Simply put it works on the conventional investment principle of “buying low” and “selling high” the key difference is the sequence of these transactions In a traditional long transaction, to express a bullish view, the buy transaction precedes the sell transaction, short selling reverses this process by initially selling the asset with the intention to buy in the future at a lower price.