For its size, the South African hedge fund industry has been doing quite well, thank you. Its AUM doubled in 2005, with an average return of 18% across 30 funds, according to Nedgroup Investments’ Hedge Fund Review, though the average lagged behind the Johannesburg Stock Exchange‘s all-share index of 47%. But that growth spurt may soon come to an end: Business Day reports that 90% of the country’s HF managers say they would cap their funds within three years so they can still produce superior returns, naturally. What’s more, 85% of hedge fund assets are concentrated in just two strategies, long/short equity and market neutral, which means unless hedge funds branch out into other strategies, investors will have no place to grow. “There is greater potential for individual funds’ capacity constraints being reached in these two categories,” Warren Brown of SYmmETRY Multimanager told Business Day, “and this is becoming an obstacle to investors wishing to invest.” In total there are just four strategies in use in South Africa; in contrast, U.S. and European HF managers employ 12-15 strategies, though that’s changing, as managers are slowly introducing a wider array of strategies. As far as the cap, that appears to be a problem for those institutional investors that, perhaps wisely, will invest only with managers with track records. Brown said in a Business Day interview that the country needs “more talent, products and entrants into the hedge fund industry” to help diversification. Gavin Glick of Peregrine Investment Managers suggests newbies have a chance to make it – if they can survive two years without inflows, and develop some sort of track record. With more managers and funds in the hopper, the cap may become a moot point.
