In February, the Minister of Finance declared hedge funds as collective investment schemes with effect from 1 April 2015. All South African hedge fund operators are required to apply for registration as a hedge fund in accordance with the Collective Investment Schemes Control Act by 30 September 2015.
On 22 June 2015, the FSB issued a media release, warning those that have not yet taken steps to register that they could face regulatory and enforcement action if they fail to do so. At that stage, no application had been received from hedge fund operators, almost three months since the declaration came into effect.
According to Mr Jurgen Boyd, Deputy Registrar of Collective Investment Schemes, a tiered approach is adopted with the establishment of two types of hedge funds; one for retail investors and the other for qualified investors. These two types of hedge funds are regulated differently, with the Retail Hedge Funds (RHF) regulated more strictly than the Qualified Investor Hedge Funds (QIHF), yet with both providing sufficient investor protection.
Qualified Investor Hedge Funds require a minimum subscription of R1 million, with life offices and pension funds as its main investors. Retail Hedge Funds does not have a minimum subscription, and will target smaller investors.
An article in the Financial Mail provides possible reasons why there is some reluctance on the part of Hedge Funds to register:
“We will see retail hedge funds by the end of this year,” says Eugene Visagie, Novare’s head of hedge fund investments.
Not all hedge fund managers will be jumping into the retail hedge fund market. “We do not think retail investors are ready for them yet,” says Evan Walker of 36One Asset Management.
A big challenge in the retail market will be investor education. “Retail investors do not understand the risk/reward implications of hedge funds,” says Walker. “Retail funds will be difficult to market.”
That said, Walker is not opposed to retail hedge funds. “Hedge fund strategies should be part of an investor’s universe,” he says. “We are not entering the retail sector now but could in the future.”
A marketing hurdle to be overcome is the perception that hedge funds are high-risk. While some spectacular hedge fund failures overseas suggest this, it is far from true in SA.
The latter is possibly also the reason why many advisers shy away from hedge funds and other investments they perceive as being high-risk. A substantial number of determinations were made against financial advisers with the help of 20/20 hindsight vision. Often, they were berated for failing to conduct a proper due diligence exercise before placing client funds in certain schemes, although the jury is still out on exactly how and what this entails.
The following benefits will result from the enhanced regulation of hedge funds, according to the Financial Mail article:
Transformation of what were unregulated qualified hedge funds into FSB-regulated collective investment schemes will bring greater certainty through better investor protection. It also brings far greater tax certainty.
“Tax certainty is the most important aspect of the new regulatory regime,” says Ian Hamilton, CE of IDS Fund Services, SA’s biggest hedge-fund administrator. Until now, there was a lack of clarity on whether tax-paying investors in hedge funds should treat gains as income, subject to income tax or capital gains subject to capital gains tax.
As collective investment schemes, hedge funds will be subject to a similar tax regime as conventional unit trusts.
Greater investor protection and tax certainty are likely to provide the hedge fund sector with an inflow kicker. “Pension funds will invest more and foreigners will be able to invest without any tax issues.”
Readers who wish to comment on this are welcome to email Paul Kruger.
