Hedge Fund Distribution In South Africa
In 2015, the South African minister of finance resolved that the business of hedge funds was to be classified under local collective investment schemes. This, of course, was not an overnight decision. Instead, it was deeply rooted in the financial crisis of 2009 in South Africa, as well as in the role newly assigned to South Africa with the G20 and the ensuing commitment to spearhead the global economic governance reinforcement process across Africa.
The first real financial and economic crisis in South Africa took place in 2009. Even though the financial system had emerged nearly undamaged, mounting pressures to maintain a stable and organised environment for finance and economy imposed further evolution of the local financial regulation in order to retain outward investments destined for the rest of African markets.
This article will briefly touch on the main regimes for hedge funds in South Africa following the regulations of 2015 as well as the process for foreign managers to access the South African markets with their funds.
Two types of Hedge Fund
In 2012, the National Treasury and Financial Services Board issued a proposed framework for the regulation of Hedge Funds in South Africa. As part of this proposal, two main types of hedge fund did emerge and two different regulatory approaches alike. A few considerations are noteworthy on this point, especially when making a parallel with the corresponding European regulation for mutual and hedge funds.
The South African framework on hedge funds, first of all, imposes to all types of hedge funds and their management companies, irrespective of the amount of assets under management, a requirement to register with the local authority. This is of interest when considering that the Alternative Investment Fund Manager Directive (AIFMD) indeed provides for minimum asset thresholds for its applicability and authorisation requirements. To the contrary of AIFMD instead, which is a manager regulation, the framework for hedge funds in South Africa tends to be more of a product directive – akin UCITS. Dissimilarly from the UCITS directive, applicable to all mutual funds, hedge funds included, the framework concentrates on hedge funds.
Hedge funds of the first type are called Restricted hedge funds, which are by definition not offered nor solicited to the wider public. Only qualified investors can be participants in these structures and the minimum investment amounts are reflective of this restriction. Typically, these funds enjoy a pretty unrestricted regulation, with few requirements imposed by the authority, like disclosure of name and number of their clients as well as details of their counterparts, along with some reporting requirements in order to assess leverage.
The second type of funds is defined Retail hedge funds. Despite the definition, not only retail investors will be allowed in this type of funds, but also institutional type investors. More restrictive prescriptions are imposed on this category of hedge funds, ranging from requirement to identify assets that can be part of the investment portfolios as well as limits on leverage and requirements of valuation and liquidity of the strategies.
Fund Market in South Africa
South Africa represents the most sophisticated market across Africa and remains appealing to international investors for its robust institutions and quality of the overall legal and regulatory system. In this regard, it is noteworthy to mention that RDR was introduced in South Africa in 2014 with a view to be fully implemented in 2018. Fund distribution in South Africa, both of local and foreign funds, is quite sophisticated and in line with international standards. However, the market for fund distribution is very concentrated, with a handful of players in every sector governing the relevant fund distribution channels. Avenues for fund distribution are the most typical ones of the market of every other country - banks, insurance companies, pension funds and independent financial advisors. The fund distribution market in South Africa is also sufficiently mature with regards to the offer of hedge funds, both local and foreign, with funds of funds being amongst the primary investors in hedge fund strategies.
How Foreign Managers Can Access South Africa
Foreign fund managers have always enjoyed access to the South African fund distribution market and with the introduction of the regulation on hedge funds now to a greater extent. Local regulation on collective investment schemes – The Collective Investment Scheme Supervisory and Control Act (CISCA) – contains under section 65 the main principles in terms of recognition of foreign funds, further implemented in local regulatory notices.
One of the main elements considered by the local regulatory authority when approving a request for recognition of a foreign fund managers is the regulatory environment where the funds is authorised in its home jurisdiction, which has to have a similar standing of the one in South Africa, not only insofar as the legislative and regulatory framework is concerned but also the powers assigned to the local regulatory authority. This has never posed a particular problem for the most known European domiciles, like Luxembourg and Ireland.
Also, foreign fund distribution in South Africa typically mirrors the one of the home state domicile, whereby in the application for approval application foreign fund managers need to specify the target market in their home state. Also, the regulatory process for approval mirrors the normal market practice where foreign fund managers had typically access to the fund distribution market in South Africa always via local partners, either in representation/joint venture or through acquisition. Accordingly, as part of the approval process, foreign fund managers will have to have a representative agreement in place with a local management company, unless they decide to open an independent representative office in South Africa, which needs to abide to local legislation in terms of the Companies Act as well as capital requirements should this be used to offer additional services.
Lastly, CISCA implementing notices contain a specific reference to UCITS compliant schemes and how these are perceived in the regulatory environment for fund distribution in South Africa. Whilst the local regulator authorities are not necessarily averse to local investment in foreign UCITS funds scheme, the very conservative environment driven by preservation of capital imposes that the use of derivates be made only for limited hedging and portfolio management purposes we would add. Of course, the introduction of the regulation on hedge funds and the ability also for the foreign ones to be recognised in South Africa would now possibly relax the very traditional standpoint on use of derivatives and allow for more complex foreign funds to enter the fund distribution market in South Africa.
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