Regulation of hedge funds in South Africa
From April 1, 2015 South African domestic hedge funds were declared “collective investment schemes” and are now regulated by the Collective Investment Schemes Control Act, 2002 (CISCA) and the regulations applicable to hedge funds which were issued by the South African Financial Services Board (FSB) (HF Regulations). CISCA is the principal statute governing retail long only funds. Although hedge fund managers were previously regulated as financial services providers in South Africa, prior to 1 April 2015 hedge funds themselves were not.
The HF Regulations define “hedge funds” broadly, and most existing South African hedge funds that employ leverage or short selling, whether formed as trusts, partnerships or otherwise, now fall within the regulatory net. Historically, there was no uniform industry structure adopted by hedge funds and fund structures differed from fund to fund and were often quite complex. However, the position under the HF Regulations is clear - a manager of a hedge fund may only establish a scheme using a statutory trust vehicle (as contemplated under CISCA, a so called “unit trust”) or a limited partnership (Permitted HF Structures). Consequently, many of the existing hedge fund structures have been obliged to migrate across to one of the Permitted HF Structures.
The new regime provides for two types of hedge funds, namely retail hedge funds (RIFs) and qualified investor hedge funds (QIFs). We have set out a comparison of basic differences between RIFs and QIFs in the table below.
|Who may invest?||An RIF is a hedge fund in which an ordinary retail investor may invest.||A QIF is a hedge fund in which only a qualified investor may invest.|
|Minimum investment amount?||There is no minimum investment amount set for RIFs.|
The investor must have either:
|Level of regulation||Highly regulated (see part 3 and 4 of the HF Regulations).||Limited regulation (see part 2 and 4 of the HF Regulations).|
Investment managers that operate hedge funds in South Africa are faced with two options, either to register a hedge fund platform with the FSB or to register a “co-named” fund on another manager’s registered platform. Registering a platform is an administratively onerous and costly exercise and is coupled with capital adequacy requirements. Notwithstanding the administrative requirements and costs involved, many larger institutions opt to register a platform as it may host several funds under a platform and it creates certainty for the funds as no third parties may interfere with investment decisions of the funds. “Co-naming” on the other hand entails registering a third party fund on the platform of an un-associated registered hedge fund manager. Although the third party investment manager is mandated to make the investment decisions for the fund (by way of an investment management agreement entered into between the investment manager and the hedge fund platform manager), the hedge fund platform manager is ultimately responsible for the oversight of the fund and is empowered to materially influence any decision made should it be of the view that the investment manager is not managing the fund in accordance with the agreed investment policy and its regulatory obligations.
On November 27, 2015 the FSB approved the first regulated hedge funds in South Africa, one QIF and one RIF platform. The platforms comprise of 35 funds between them and were registered with effect from November 27, 2015. At the time of writing, the FSB is still considering a further 18 hedge fund platform applications with over ZAR95 billion of assets under management.
Although the regulation of hedge funds in South Africa presents an exciting opportunity for both fund managers and investors alike, it is not exempt from criticism. There are several interpretational concerns relating to the HF Regulations and the FSB has not provided any guidance on whether foreign hedge funds wanting to market to South African residents may register in terms of the new HF Regulations. Moreover, there are onerous reporting requirements imposed on hedge fund managers and many industry role players have argued that the FSB is attempting to overlay retail fund regulation in what has traditionally been an alternative funds environment and consequently there is a regulatory mismatch between what is required by law and what works in practice.
Despite the criticisms, the regulation of hedge funds in South Africa offers the prospect of greater returns in a more secure environment. The new regulation also creates scope for the establishment of funds which invest in alternative asset classes and for investors to adopt more aggressive investment strategies in a regulatory certain context.
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