In April 2015, the South African Financial Services Board (“FSB”) released Board Notice 52, declaring all hedge funds to be regulated hedge funds, falling under the Collective Investment Schemes Control Act (Act 45 of 2002) (“CISCA”). A collective investment scheme (“CIS”) can be described as an investment product that allows many different investors to pool their money into a portfolio. Unit trusts were the first collective investment scheme to be offered to investors in South Africa. Hedge Fund Managers, needing to comply with CISCA were now required to either register for their own Management Company (a registered Management Company as defined under CISCA, section 42) or to platform with an existing Management Company under a co-naming white label arrangement.
All Hedge Funds needed to register as a regulated hedge fund by September 30, 2015, choosing to register as either a retail or qualified fund structure. From the end of 2015 to date, declared regulated hedge funds have begun transitioning to the new regulatory structures. South Africa’s hedge fund industry is currently in a state of transition. A significant amount of the existing hedge funds went the route of registering as a qualified hedge fund.
However, there is newly sparked interest coming from Fund Managers coming into the retail space, which may increase the amount of retail hedge fund products open to the general public.
Retail investors could now enter hedge fund structures, attracted to brand name hedge fund managers, known platforms and to new opportunities previously not made available. Retail investors, although requiring smaller minimums than the required one million rands (R1 million) investor requirement for qualified hedge fund investors, are now able to invest. This also encourages the more traditional Fund Managers to register and offer more alternative products than the more traditional unit trusts. There are also opportunities now for linked investment service providers (“LISPs”) to also attract hedge funds onto their distribution lists to further diversify investor choices. Previous more traditional based administrators, risk providers, compliance offers and legal advisors are also expected to gain from the announcement of regulated hedge funds.
- To provide daily up to date data
The face of hedge fund administration needed to adapt the pending regulatory environment. Too often Administrators, in valuing monthly dealing hedge funds, were used to catching up trade and profit and loss data towards the end of a given month as part of their monthly hard NAV process and were not focussed on pure daily soft pricing (reconciling cash, positions, trades on a daily basis with NAV based fee calculations). With the proliferation of the new regulated hedge funds, even if that hedge fund structure consists of monthly dealing investor price points, under the CISCA environment various other stakeholders need daily up to date data, in terms of decision making (fund manager), compliance and risk management. This will lead to more accurate daily priced funds even if the fund does not deal daily.
- To enhance hedge fund risk management and compliance
Under Board Notice 52, daily compliance checking needs to be performed for all regulated hedge funds, requiring daily reconciled data on positions, cash, exposures and counterparties. In offering a regulated hedge fund, the Management Company needs to ensure that they either provide daily compliance and risk management functions (including the use of a suitable administrator capable of providing daily accounting data) or platform to allow these functions to be suitably performed under a platform arrangement.
- To know platforms
The rise of regulated hedge fund platforms in South Africa has started from the announcement of regulated hedge funds. Platforms need to offer smart outsourced arrangements in terms of administration, approved counterparties like prime brokers, trustees and risk providers. Platforms also need to ensure a daily Net Asset Value processing model occurs with their outsourced administrators enabling daily reconciliations on the overall NAV, prime broker, counterparty, cash and positions in real time. Not only must the platform give the Hedge Fund up to date performance data who in turn can use this information for real-time decision making, it needs to make this data available for stakeholders in the value chain on a daily basis, notwithstanding ensuring regulatory compliance in terms of CISCA, at all times.
Hayden Reinders is Head of Hedge Fund Administration at Prescient Fund Services in South Africa.
As originally appears on Africa Global Funds: Hedge fund administration in South Africa