Who can invest in a hedge fund?

Hedge funds used to be an exclusive asset class for the wealthy. But can the average person invest in them nowadays? And how else can one get exposure to them in South Africa? 

When one typically hears the term “hedge fund”, one of two things may cross your mind. One, that you’re not quite sure what it entails or two that it’s exclusively for the rich.

According to Barclay Hedge, a hedge fund is “an alternative investment vehicle available only to sophisticated investors, such as institutions and individuals with significant assets.”But given the volatile state of the South African economy, diversifying seems to be the way to go.

“There are a variety of reasons to include hedge funds in a portfolio of otherwise traditional investments. The most cited reason to include them in any portfolio is their ability to reduce risk and add diversification,” states Investopedia.

Fin24 similarly added that in a low-return season, any investment that renders positive results is one worth considering.

But how do you invest in hedge funds?

Late 2015 saw the regulation of hedge funds as approved by the Financial Services Board (FSB). This has since meant that as of September 2015, all new hedge funds housed in South Africa were to be Cisca compliant and registered.

Under the regulations, the following two categories of hedge funds exist:

• Retail investor: These hedge funds typically have stricter controls than qualified hedge funds and are open to any investor.
• Qualified investor:  Unlike the retail investor these funds are restricted to investors with more than R1 million to invest. Further, investors need to exhibit the sufficient know-how to recognise hedge fund risks, or alternatively enlist a financial advisor who does.  

“The way South African hedge funds are managed is very different to the way the offshore hedge funds are managed. They’re managed by teams who typically come from traditional investment institutions where they have been successful portfolio managers,” Sanlam adds.

Sanlam explains that hedge funds and their fees structure may not be as complicated as you think, “The interest of the investor and the hedge fund manager are very much aligned to each other. Hedge funds charge a management fee and a performance fee like in the traditional space, however performance fees are levied relative to cash and not relative to a benchmark. Hedge funds account for fees by means of series accounting and as such you pay only for performance you have enjoyed and not for performance generated before you joined.”

Important to note, however, is that hedge funds do not necessarily offer the best returns. Investors often tend to attach high expectations but according to experts 10 - 18% return is typically deemed as having done very well.

There are numerous investment houses that oversee and manage various hedge fund products in South Africa, if you are interested in buying into one, the best would be to shop around with the assistance of a trusted financial advisor.