From this year ordinary investors in South Africa have been given the opportunity to add another tool to their portfolios. New regulations have introduced the concept of retail hedge funds to the market, allowing investors to access these funds in the same way that they currently do with unit trusts.

Introduction of retail hedge funds

Hedge funds have been operating in the country since the early 2000s, but until now they have really only served life companies, pension funds and high-net-worth individuals who can afford to invest a few million at a time. With the introduction of retail hedge funds, however, they are now going to be available to anyone.

What is it?

The first thing to understand about local hedge funds is that, for the most part, they are not the sort of weird and wonderful products that make the news in other parts of the world. The South African industry is quite conservative and uses only a few basic strategies. The main concern for most local managers is to use hedging techniques to protect against big losses.

The best illustration of this is that during the 2008 market crash, the majority of local hedge funds significantly outperformed the JSE. In a year when the All Share Index lost 23%, many hedge funds actually delivered positive returns. Most of them are therefore not the kinds of risky investments that try to make 30% or 40% every year. They rather aim to deliver stable returns that will be fairly predictable, whether the market is up or down. That is something that every investor should want to hear. There are, however, a few things that anyone looking at these products should be aware of. The first is that retail hedge funds may not be as liquid as unit trusts. Where money in a unit trust can be accessed in a few days, withdrawals from hedge funds could take up to a month.

Hedge funds may also require fairly large initial investments. The first retail products need a minimum lump sum of R50,000.

Finally, the best way for investors to get into hedge funds will probably be through funds of hedge funds that blend a selection of managers and funds together. This not only reduces the risk of trying to pick the right products, but also means you will get a broad selection of the best of what is available.

Words: Patrick Cairns

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