Q&A: Hayden Reinders And Rob Childs, Prescient Fund Services
Rob Childs, Head of International and Hayden Reinders, Head of Alternative Administration at Prescient Fund Services discuss the opportunity for foreign hedge funds in South Africa and the practical steps for getting authorized.
AW: Why should hedge fund managers be looking at distribution opportunities in South Africa?
HR: South Africa was traditionally considered to be a tough market to succeed in for foreign hedge fund managers, but the environment has been changing gradually. Since 2009, capital controls have been progressively relaxed for both companies and individuals, and political uncertainty has also meant that South African retail investors are seeking to diversify their investments.
RC: On top of this, in the five years following the financial crisis of 2008, the South African capital markets boomed and created a lot of wealth that is now looking for global diversification.
HR: Under the current legislation, South African Pension Funds (known locally as Retirement Funds) can now invest up to 30% of their capital into offshore funds, which is creating an opportunity for both large and smaller foreign hedge fund managers to distribute their products into South Africa.
AW: How has the market for hedge funds changed in South Africa?
HR: Just looking at the average allocation to hedge funds by South African investors, in December 2018 it stood at around just under 2%, which is well below the national averages you see elsewhere in the world. This has been compounded by the relatively small size of the domestic South African hedge fund market.
RC: This means there is scope for foreign fund managers to partner with local firms to gain access to the market, for example via a third-party Management Company arrangement.
HR: The South African market has changed in the way in which hedge funds have been regulated as well. South Africa’s regulated investment fund regime, the Collective Investment Scheme Control Act (CISCA) has introduced regulation around hedge fund investing, giving rise to both retail and qualified investor hedge fund schemes targeting different investors types. While investors may want to allocate to offshore funds, there is now more emphasis on regulated fund wrappers like UCITS. The traditional method of investing in offshore, unregulated hedge funds still happens, but the trend is moving toward investing into regulated structures.
AW: What hedge fund strategies are most likely to be approved for distribution in South Africa?
RC: In order for an offshore fund to be distributed in South Africa it needs to be authorised by the Financial Sector Conduct Authority (FSCA), South Africa’s regulator. It can be much harder to have funds authorised for distribution if they do not conform to recognized structures, such as the UCITS requirements, making UCITS one of the more ideal formats for funds that are seriously being considered for South African distribution. It is worth consulting a local partner on the best ways to approach authorisation.
HR: Generally, if a fund strategy can be mapped readily onto a local fund that has been authorised by the FSCA already, then it is likely to receive quicker approval. Newer asset classes like cryptocurrencies are unlikely to be successful as there is no familiarity with these strategies. We are seeing multi-strategy funds and those with investments that are readily priced against public markets data receiving quicker approval.
AW: What steps are fund managers taking in terms of their distribution plans?
HR: Probably the easiest way for a fund manager to access South Africa is via a Representative Office arrangement with a South African ManCo under Section 65 of CISCA. Working with a local partner, managers of Collective Investment Schemes, Qualified Investor Hedge Fund Schemes and Retail Hedge Fund Schemes can apply to the FSCA for approval to distribute non-South African funds. Effectively the hedge fund manager is entering into a representative agreement with a third party FSCA approved Management Company.
RC: Furthermore, there is now an established path around the use of UCITS funds by UK and US managers who want to target the South African market. The Association for Savings and Investments SA (ASISA) publishes a list of approved Foreign Collective Investment Schemes, which includes major names in global asset management including Aberdeen Standard, Fidelity, Franklin Templeton, Fundsmith and Prudential, plus many more.
AW: What does a section 65 representative ManCo actually do for a foreign fund manager?
RC: The ManCo should generally oversee much of the work involved in the manager’s initial submission to the FSCA, including the KYC checks and document review. It should also support the application process to the regulator, liaise with auditors and ensure that the local capital requirements are met. Where there are queries from the FSCA, the ManCo can work alongside the fund manager to resolve these.
HR: The service needs to be able to cover ongoing operational needs, specifically relating to marketing material and the possible subsequent application for additional sub-funds or changes to scheme particulars. The local partner should also be able give advice to fund managers when any new regulatory requirements arise.
AW: Are there any other ways fund managers can distribute into South Africa?
HR: One of the more institutional solutions is for Retirement Funds to invest via life wrapper structures that in turn can invest in offshore assets, such as Luxembourg or Irish funds. In practice, a South African Life Insurance company with the right structuring capabilities can issue fund policies to the end investors. The fund policies invest into a life-pooled portfolio, which in turn invests into the underlying offshore fund. Firms like Prescient Fund Services (Pty) Ltd are able to carry out the local South African Portfolio Administration and Policyholder Administration that is required to support these investments.
RC: Another structure that is advantageous to certain South African institutional investors that are able to take advantage of the tax treaties that exist between South Africa and many of the world’s major capital markets, is the Tax Transparent Fund, or TTF. These exist in a number of European fund domiciles, including Ireland, which has in place legislation for a Common Contractual Fund (CCF), which is authorised and regulated by the Central Bank of Ireland. Eligible investors benefit from asset pooling in a tax-efficient manner, as they are treated on a look-through basis and deemed to be the direct beneficial owners of the underlying investments.
Rob Childs is Head of International and Hayden Reinders is Head of Alternative Administration at Prescient Fund Services.
Prescient Fund Services (Pty) Ltd is an authorised financial services provider (FSP 43191).
Prescient Management Company (RF) (Pty) Ltd, company registration 2002/022560/07 is registered under the Collective Investment Schemes Act, 2002.
© The Sortino Group Ltd
All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or scanning or otherwise, except under the terms of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency or other Reprographic Rights Organisation, without the written permission of the publisher. For more information about reprints from AlphaWeek, click here.