FSB Presentation

What is a Hedge Fund?Define Long only then HF:

◦Long only = good news◦HF = all news

Hedge funds may make use of short selling, leverage and derivatives to assist in developing an alternative investment strategy, to generate absolute returns that should in essence be uncorrelated to the markets.

Historical Context1949 Alfred Winslow JonesFirst Fund of HFs Created 19691993 some hedged trading in Prop Desks1995 First SA hedge fund appears1998 LTCM Crash (Systemic Risk)2000 Tiger Fund closes2003 AIMA SA launched (Now under

ASISA)2012 Industry AUM record at R33 Billion

in Single Strategy Funds

Reasons I want to invest in HFs Investors seeking Alpha

(leverage helps)Institutions looking for

diversification of riskSome HFs don't have high

returns, focus on diversification element

Fee Structures2% Administration Fee /

Management Fee20% Performance fee

Hurdle RatesHigh Water MarksLock up periodsHfs are Performance Seekers not

Asset Gatherers

4 Main Types of Hedge Funds

1. Long / Short Strategies2. Relative Value & Arbitrage3. Event Driven4. Distressed securities

5. Other Alternatives = wine, coin, collectables

Main objective = uncorrelated returns (to reduce investment risk)

AUM Per Strategy

RegulationsCat IIA - ManagerRegulation 28 – Pension funds

◦15% Alt◦10% HFs or PE◦2.5% per single hedge fund

Industry is Self Regulated

G20 RequirementsSystemic Risk ExplainedProposed HF frameworkNew move to CISCA

Graph of Industry AUM

Retail Vs PrivateRetail = UCITS (Undertaking for

Collective Investment in Transferable Securities)

Professional Investors = PI-Funds

Over regulation will increase barriers to entry

Will move money to the bigger playersLead to Indifferent PerformanceLead to extra fees – absorbed by

investors

Comments from the industry on the Proposed Framework

Retail is based on UCITS model◦Expensive and Restrictive

Must have a PIF model◦Driven by investors understanding for

its controls◦Current proposal is a good step ◦No sense of urgency – HFs are

progressing well with self regulation

Word from the IndustryHedge funds are performance

seekersNot asset GatherersSmall opportunities to capture

Alpha, HFs are generally small, scalability problems

Do not want to grow too fast or too big

Raising Regulations on AUM to comply with perceived CISCA current requirements for unit trusts will lead to damage

Sources of CapitalHNWIFamily OfficesFund of FundsFoundations and EndowmentsPension Funds / Life FundsCapital Introductions via PBSeed Capital / Hedge Fund Hotel

Global Best Practices followed in SA3rd Party Fund Administration (IDS)

◦ NAV PackageMultiple Prime brokerages3rd party Custody

◦ Fund Manager doesn't receive the money at any point

Following these practices avoids Madoffs and other Ponzi Schemes (Abante Capital / Herman)

Hedge Fund EcosystemFund ManagerPrime Broker (1-2 PBs)CustodianFund Administration 3rd Party Marketing / Public

RelationsLegal and ComplianceRisk Management

ReferencesNovare 2012 ReportAIMA SA HF BookletInterviews