South Africa Hedge Fund Managers Beat Benchmark Equity Index

  • Long-short funds gain 15% compared with 4% for JSE index
  • Total fund assets climb 16% to 62 billion rand, Novare says

South Africa hedge fund managers betting on equities posted returns more than three times higher than the nation’s benchmark stock index in the year to the end of June, according to an annual survey by Novare Investments Pty Ltd.

The so-called long/short equity funds, which bet some stocks will rise and others will fall, returned an average of 14.7 percent in the year while the FTSE/JSE All Share Index gained 3.7 percent, the survey showed. Managers placed 37.8 billion rand ($2.75 billion), or 61 percent of hedge fund assets, into such accounts. Assets under management increased to 62 billion rand from 53.6 billion rand in the previous period, according to the survey.

“Despite heightened volatility in the local equity market, the equity long/short strategy fared relatively well,” Cape Town-based Novare said in its 12th survey, released on Monday. “The industry grew assets mainly as a result of solid fund performance.”

The South African hedge fund industry is seeking to expand its footprint. Rules that took effect Sept. 30 focus on attracting more money by creating a retail-friendly category and reducing the impact of what some managers termed the global industry’s “cowboy image” by increasing transparency and oversight.

Fixed-income funds were the second-most popular, accounting for 14 percent of assets, delivering an average return of 7.7 percent, Novare said. Funds with an equity-market neutral strategy had 8.7 percent of assets while posting an average return of 9.9 percent, according to the survey. Commodity-focused funds held 3.7 percent of assets, according to the survey.

Sharpe Ratio

The equity long/short strategy earned an average Sharpe ratio, which evaluates risk-adjusted return, of 2.17 compared with 1.63 for fixed income and 1.52 for equity-market neutral funds, Novare said. The previous survey to June 30, 2014, showed the long/short strategy posted a return of 20 percent while the benchmark index gained 33 percent.

Managers added 16 funds and dissolved six, leaving 111 in place at the end of the year, the latest survey showed. Three-quarters of assets are managed by companies that oversee more than 5 billion rand, Novare said. The largest funds, those with more than 1 billion rand, posted the best average return at 13.8 percent. The worst performing averaged 10.1 percent and typically contained 100 million rand to 200 million rand.

More than half of managers charge fees of 1 percent of assets under management plus 20 percent of profit, according to the survey. Funds representing 16 percent of assets include claw back provisions in their subscription agreements, allowing investors to reclaim fees if the manager fails to hit performance targets, Novare said.

Funds of hedge funds remained the leading type of allocation with 57 percent of the market, thought this was a drop of 4 percent from the previous period, Novare said. Deposits from high-net-worth people rose to 26 percent of assets from 14 percent, it said. Pension funds allocated just 0.1 percent of assets, down from 8.4 percent after a large fund with mostly pension fund investors closed, the survey showed.

More than 7 percent of funds were hard closed, meaning that no further capital would be accepted, while fewer than 10 percent were soft closed, only accepting money from current investors, according to Novare. The remaining 83 percent were accepting new investors, it said.

South Africa’s hedge funds remain a small part of the country’s fund industry, which had assets of 1.8 trillion rand after an inflow of 77 billion rand during the year, according to the Association for Savings and Investment South Africa.

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