Page 154 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 8 Classification of CISs

Similarities and differences
As a separate category of collective investments, hedge funds are in some respects subject to
different rules. Investors and advisers 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.
R 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.
R Like other collective investment schemes, retail hedge funds will publish total expense ratios
(TERs) and portfolio details.
R For tax purposes, hedge funds are currently treated in the same way as equity unit trusts, but
a Treasury discussion document suggests this could change in future.
R Before they were regulated as collective investment schemes, most hedge funds did not
distribute income. In terms of the Income Tax Act, income must now be distributed within
12 months. As is the case with other collective investment schemes, distributions will be
taxable in the hands of investors (partly as interest and partly as dividends, depending on the
instruments held by the fund).
R Nearly all hedge funds charge high uncapped performance fees – usually 20% of
outperformance. This is over and above the 1% or 2% annual fee (referred to as a 1/20 or 2/20
fee structure). Very few funds have claw-back provisions (ie, repayment of performance fees
to investors in the event of performance retractions).
R Performance fee hurdles affect the impact of performance fees on an investor’s net return.
A fund levying performance fees on all positive returns will take a larger share of profits than
one using inflation or an interest rate as a fee hurdle.

Salient features of Qualified and Retail Hedge funds
Qualified Investor Hedge Funds must limit their membership to qualified investors (QI).
A qualified investor:
„ invests at least R1m in the fund
„ has demonstrable knowledge and experience in finance and business, or
„ has appointed a FSP who has demonstrable knowledge and experience to advise the investor
regarding the merits and risks of a hedge fund
Other duties applicable to QI funds include:
„ at least monthly valuation and unit pricing
„ use of a structure that ensures that investors will not suffer losses in excess of the value of their
investments or contractual commitments
„ setting the level of exposure or value-at-risk for each portfolio of the QI fund
„ repurchase of units within three months of notice from an investor
Retail Investor Hedge Funds are open to all investors but are more closely regulated.
Rules governing retail hedge funds include:
„ daily valuation and unit pricing
„ appointment of a custodian
„ borrowings of no more than 10% of the value of the portfolio for liquidity purposes
„ repurchase of units within one month of notice from an investor
„ restricted leverage (no more than double the value of the portfolio)
„ monthly reporting to the Registrar (within 14 days of each month end)

152 Profile’s Unit Trusts & Collective Investments September 2025