Page 151 - Profiles's Unit Trusts & Collective Investments - September 2024

Classification of CISs

Globally, the hedge fund industry is a force to be reckoned with. There are well over one hundred
thousand investment funds available worldwide – of these nearly one in ten is a hedge fund.
According to ASISA statistics, the SA hedge funds industry at the end of December 2023 had
assets under management of R137.9 billion in 213 regulated funds. About a third of the assets
under management (32%) were held in Retail Hedge Funds and the balance (68%) in Qualified
Investor Hedge Funds.
Regulations Governing Hedge Funds
In South Africa, hedge funds were an unofficial part of the collective investments landscape for
many years. In 2015, however, hedge funds were pulled under the umbrella of CISCA (the
Collective Investment Schemes Control Act). Before 2015 hedge fund managers were licensed and
regulated by the FSCA in terms of FAIS but not under CISCA. They contractually agreed the terms
of investment with investors. Under the new rules many conditions of investment are regulated
and cannot be varied by the manager. These include repurchase obligations, valuation and pricing
requirements, and disclosure and reporting requirements.
Hedge funds were officially classified as
collective investment schemes from 1 April 2015
(Government Notice 141 of 2015). Established
hedge funds that accepted money from the public
had until the end of September 2015 to lodge
applications for registration with the FSCA. An
amendment to existing regulations has created a
new investment scheme category for hedge funds.
This means that the rules governing hedge funds
are not always the same as those which apply to
unit trusts.
FSB Board Notice 52 of 2015, published by
the Registrar of Collective Investment Schemes
on 6 March 2015, set out various requirements
with which hedge had to comply before 31 March
2016 (or within 12 months of registration).
For existing funds, especially those targeting retail investors, the progression to being
registered under CISCA involved several steps: application, FSCA approval, conversion of the
existing fund (historically, none did daily pricing), registration, and finally the formal launching of
the reconfigured fund. The first two hedge funds approved under the new regulations by the FSCA
were launched on 1 February 2016.
The new regulations allow for two types of hedge funds: restricted (or “qualified”) and retail.
Qualified funds are aimed at the well-heeled and well-informed: a qualified investor must deposit at
least R1 million into the restricted hedge fund and must have sufficient expertise to understand the
risks of investing in it. Retail funds, which are to be more closely regulated, must, amongst other rules,
restrict gearing to 100% of assets and may not invest in property or qualified investor hedge funds.
Similarities and Differences
As a separate category of collective investments, hedge funds are in some respects subject to
different rules. Investors and advisors alike need to be aware of the ways in which hedge funds
differ from other collective investments. Some of the noteworthy similarities and differences are
highlighted below.
As with other collective investment schemes, investors in retail hedge funds will only risk
the capital they invest. This may not always be the case for qualified funds, however –
qualified investors need to carefully check their contractual obligations before investing in
qualified funds.
Like other collective investment schemes, retail hedge funds will publish TERs (total
expense ratios) and portfolio details.

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