Murray Winckler of Laurium Capital sees the hedge fund industry in South Africa grow significantly in the next five to ten years.
Still in its infancy, the South African hedge fund industry is gradually forging a place among the global markets. Murray Winckler from Laurium Capital talks to HFM Wee about the many opportunities for growth..
HFMWeek (HFM): In your professional experience, what factors have contributed to the growth of the South African fund industry over the past three years?
Murray Winckler (MW): Firstly, the hedge fund industry in South Africa is relatively small. We have got R30bn of assets in the industry, a figure which has grown from R10bn in 1995, but it is still a fledgling industry from a South African perspective. Compare this to the unit trust industry in South Africa, which is sitting at well over $100bn. My view us that the industry will grow pretty strongly over the next five to ten years, as we have seen from and international perspective. However, in the last two years or so the industry has stagnated quite a lot and the assets have stayed at similar levels, although a lot of this was caused by Regulation 28 which applies to pension fund assets in South Africa. The current legislation allows 2.5% investment into alternate assets and if you structured a certain way and used the bench structures you could possibly increase this to 5%. It is a very small part of the pension fund industry which can go into hedge funds. There are other absolute return funds out there, but pure hedge funds have been held back quite significantly. In South Africa, the fund of funds generally hold about 60% of the assets so they get allocations from the pension fund industry and then invest directly into local hedge funds. On a positive note, the fact they are small means the hedge fund managers are able to really move around the market and do some quite interesting trades.
HFM: How do South African hedge fund managers compete with offshore jurisdictions? What does South Africa offer to investors which other jurisdictions cannot?
MW: The global multi-strategy and the global long short guys tend to focus on the top 40 market capital stocks where the big liquidity is. If you look at the mid-tier space in South Africa, this is where there are a lot of opportunities to arbitrage and carry out some interesting trades. We do play a lot in the larger capitals, but the international investors are part of global emerging market funds and would go into your top 20 to top 30 market capital stocks. From offshore, they would be competing on that front. The South Africans have the advantage of being on the ground, knowing the companies pretty well and a lot of the hedge funds in South Africa focus solely on South Africa.
HFM: In what way do you expect the proposed upcoming AIFM Directive and SEC legislation to affect South African hedge funds?
MW: South Africa has been quite regulatory intensive in the hedge fund industry because of funds of funds, and all managers have to be regulated with the financial services board here. They are approximately 120 licences allocated to get a category 2A licence and it is pretty rigorous process. The large managers control about 60% of the assets and approximately 40% of the strategies are long short and 20 -25% market neutral. It is very seldom you will see the larger guys going more than about 80% net long exposure and probably down to a flat, neutral exposure. There is not much gearing in that space. Fixed income has also grown quite a lot in the last two years, and now 10 -15% if the industry has moved into fixed income funds which have started doing fairly well, particularly in the last 12 months.
HFM: What challenges do you see emerging for South African funds in the future? How is Laurium preparing for this?
MW: Our business stared up just over two years ago when we targeted one third from fund of funds, one third from high-net-worth individuals in South Africa and one third from offshore. Today, the fund of funds are a much smaller portion and we will probably market a lot more internationally, and ho0pe to have more than 50% of our assets from international players coming in. South African managers have not marketed aggressively internationally to capture funds, but i think this will be one of the big trends you will see over the next five years. The other big trend is expansion into the African markets, especially as South African is the gateway into Africa. The prospects for growth are pretty exciting both inside and outside South Africa.