Why is South Africa bucking the global trend on hedge funds?

The South African hedge fund industry has been experiencing a decline in assets under management (AUM) since 2016. In just the two years between 2016 and 2018, hedge funds saw their AUM decline by over 30%, from R68.6bn to R47.1bn.

‘This is the opposite of what is happening globally,’ said Gyongyi King, CIO at Alexander Forbes Investments (pictured). ‘Globally, the allocation to alternatives in general is on the rise, and quite significantly so.’

King was speaking at the recent Alternative Investments Forum, hosted by the Collaborative Exchange.

‘In South Africa, we are actually going against the consensus globally,’ King added. ‘The switch to alternatives in a low-return environment is actually good for investors. It is good for their long-term return profiles, and good for increasing the probability of getting them to the outcomes they are looking for.’

This dislocation in South Africa has been the result of a number of factors – not least of all underwhelming performance in the years leading up to 2018. However, King said that managers could be doing more to promote the value of their offerings in this space.

Fitting into a solution

‘You really need to ensure that you have your market segmentation really well thought out in your business plan,’ she said. ‘Even niche strategies need to think about this.

‘It’s not good enough to say that returns are being generated. That is just the ticket to the game. What exactly are you specialising in? Are you trying to diversify portfolios, develop an AI (artificial intelligence) perspective, or do you have an advantage from an ESG perspective? Where exactly is the niche that you are trying to position the product, and, for investors, what is the benefit of that niche?’

This, she said, is something to which local hedge fund managers have paid enough attention.

‘Hedge funds are struggling to generate AUM growth in South Africa because the positioning of their products within a portfolio is something that has been forgotten,’ said King. ‘Hedge funds need to think about the full investment decision.

‘Thinking about hedge funds only relative to other hedge funds is not helping investors understand how they can use them. Managers need to spend a lot of time telling investors how this will fit in a general portfolio solution.’

Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.