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Page 1: Novare hedge fund report - South · PDF fileOVERVIEW 2 ASSETS UNDER ... previously untapped retail investor market will now be able to access the industry. In the past, ... For many
Page 2: Novare hedge fund report - South · PDF fileOVERVIEW 2 ASSETS UNDER ... previously untapped retail investor market will now be able to access the industry. In the past, ... For many

OVERVIEW 2 ASSETS UNDER MANAGEMENT 3

Fund launches and closures 5Strategies 5Largest hedge funds 6Capacity 6

HEDGE FUND MANAGER PROFILE 7Total assets 7Hedge fund assets 7

TRACK RECORD 8STRUCTURE 9INVESTORS AND FEES 10

Investors 10Dealing frequency 10Fees 12

OPERATIONS 15Fund valuation and client administration 15Risk monitoring and compliance 16Prime broker 18Portfolio transparency 18

STRATEGIES 19Equity long/short 19Equity market neutral 21Fixed income hedge 23Multi-strategy 24

CLOSING REMARKS 26CONTACT US 27

Disclaimer 27

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 1

Page 3: Novare hedge fund report - South · PDF fileOVERVIEW 2 ASSETS UNDER ... previously untapped retail investor market will now be able to access the industry. In the past, ... For many

OVERVIEW

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 2

This 2014 edition marks the eleventh year of the Novare Investments South African Hedge Fund Survey. The findings in this report represent the position of locally domiciled hedge funds over the 12 months ending 30 June 2014, and comments on trends observed over the past few years.

The survey is independent and participation is voluntary and open to all asset management companies offering hedge funds, predominantly domiciled in South Africa. This year, 104 different hedge fund mandates and 58 asset management companies participated.

The much anticipated regulation of hedge funds is expected to stimulate growth in assets as the previously untapped retail investor market will now be able to access the industry. In the past, hedge funds were only positioned for high net worth individuals and institutions.

Novare Investments would like to extend our sincere gratitude to all hedge fund managers who contributed to the survey, which would not be possible without their continued support and participation.

• Hedge fund assets surpass R50 billion

• Largest single manager hedge fund assets exceeds R5 billion

• Total number of participating hedge fund firms 58 asset management companies

• Total number of participating single manager hedge fund mandates 104 hedge fund mandates

• Inflows into the hedge fund industry for the 12 months ending June 2014 exceeded R9.5 billion

• Equity long/short strategy now represents 59.9% of industry assets

• Equity long/short strategy received the most new capital inflows

• 78.6% of industry assets are managed by managers with hedge fund experience exceeding five years

• A notable increase in the use of the en Commandite partnership by hedge fund managers, from 60.3% of participants in 2013 to 67.8% in 2014

• An increase in the use of a second prime broker

Size and scale of industry

Characteristics of industry

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ASSETS UNDER MANAGEMENT

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 3

Assets in the local hedge fund industry reached a new high during 2014. As at 30 June 2014 South African based hedge funds managed assets of over R53.6 billion - an increase of more than R10.0 billion from the previous year when assets were at R42.2 billion. This is a 27.0% increase, which can be attributed to a combination of strong positive performance from managers, especially equity-focused hedge funds, as well as net flows into the industry.

Assets under management

Inflows allocated to the hedge fund industry for the 12 months ending June 2014 exceeded R9.5 billion of which R654 million was allocated to new funds launched during the year. Total outflows amounted to R5.1 billion with a further R1.1 billion of capital returned to investors by funds that closed down.

Net inflows of approximately R4.0 billion indicate that the significant growth in assets was a combination of inflows and returns from participants, with average returns over the 12 months exceeding 10.0%.

The equity long/short hedge fund strategy received inflows exceeding R5.5 billion and outflows of approximately R1.8 billion. Only one fund in this category closed and returned investor capital during the 12-month period, resulting in net cash inflows of R3.5 billion. This is in line with 2013 when net inflows were R4 billion.

Equity market neutral funds were net receivers of approximately R900 million in capital (inflows exceeding R1.3 billion and outflows of approximately R400 million), the first time in six years that the strategy had net inflows. During 2013 equity market neutral funds lost assets of approximately R350 million.

The strategy that lost the most capital during the 12 month period was fixed income hedge funds with total net outflows exceeding R1.4 billion. Approximately R800 million of the net outflow was returned to investors by funds closing down, while a further R1.4 billion was redeemed. The strategy received new allocations of R800 million during the year.

R 1,388 R 2,125 R 3,286R 6,068

R 15,361

R 25,895

R 30,274 R 29,434R 32,096 R 31,433

R 33,595

R 42,204

R 53,635

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 4

Net cash flow according to strategy

The bulk of net cash inflows were allocated to companies with hedge fund assets exceeding R2 billion (63.6% of net cash flows), followed by managers with assets under management of between R1billion and 2 billion receiving 20.5% of net cash flows. Companies with hedge fund assets of between R500 million but less than R1 billion received a mere 6.3% of new inflows.

Hedge funds with total assets of between R200 million and R500 million received 4.7% of new capital allocations, and those with assets of between R100 million and less than R200 million, 1.1% of new money. Funds with assets of less than R100 million received 3.9% of total cash flows.

(2,000.00) (1,000.00) - 1,000.00 2,000.00 3,000.00 4,000.00 5,000.00

> R 1 billion

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Net cash flow according to hedge fund assets

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Equity long/short Equity market neutral

Fixed income hedge Multi-strategy Commodities Structured finance Other

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Inflows Outflows Dissolved Fund

Most other strategies were net receivers of capital allocations, except for structured finance that experienced marginal outflows.

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 5

A total of eight new funds were launched between July 2013 and June 2014, managing a total of R690 million at 30 June 2014. Of these, 50% were equity long/short funds.

Half of the new funds launched were from asset managers already overseeing hedge fund assets in another strategy.

Half of the assets allocated to new funds were from funds of hedge funds, followed by 30% from high net worth individuals.

Seven funds returned investor capital (closed down); most of these were fixed income hedge funds and multi-strategy funds.

Strategy

FUND LAUNCHES AND CLOSURES

STRATEGIES

The equity long/short strategy continued to dominate the local hedge fund market, gaining share from 12 months earlier and representing 59.9% of assets (compared to 52.5% of assets 12 months earlier). Fixed income hedge funds reduced in relative size from 15.7% in 2013 to 11.6% in 2014. This was due to fund closures, relative underperformance and net outflows.

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Equity long/short Equity market neutral Fixed income hedge Multi-strategy

Volatility arbitrage Structured finance Commodities Other strategies

The equity market neutral strategy remained relatively unchanged despite strong inflows (from 7.4% to 7.1%).

Multi-strategy hedge funds increased to 9.3% of industry assets compared to 9.0% a year ago.

Volatility arbitrage funds represented 3.1% of the industry, a marginal decrease from 3.9% recorded in 2013.

Structured finance funds constituted 2.7% of industry assets compared to 2.8% in 2013.

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CAPACITY

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 6

Ten largest hedge funds

Most participating funds indicated additional capacity. Funds managing 88.1% of industry assets are still open for new investments – an increase from last year’s 82.1%. All participating strategies indicated combined capacity in excess of R85 billion, compared to R72 billion one year earlier.

Nearly 6.4% of funds indicated that they were soft closed, meaning they were only accepting new capital from current investors. These funds were either equity market neutral, equity long/short or fixed income hedge funds.

Funds managing 5.6% of industry assets no longer accepted any further capital from current or new investors; they were hard closed.

LARGEST HEDGE FUNDS

As at June 2014 the ten largest hedge funds in South Africa managed 44.1% of the total industry assets. This increased from 42.9% from the previous year. This upward trend has been observed since 2010.

Approximately 38.1% of the net inflows were allocated to the ten largest hedge funds.

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10 largest funds assets Total assets

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 7

HEDGE FUND ASSET MANAGER

TOTAL ASSETS

For many hedge fund managers, hedge fund products are not their sole source of income and many traditionally long-only asset managers also have hedge fund products as part of their products. Asset managers with total assets of less than R500 million managed 13.3% of total South African hedge fund assets, compared to 9.4% twelve months earlier.

Companies managing capital between R500 million and R1 billion managed 7.0% in the last year compared to 6.5% in 2013. Companies with total assets of between R1 billion and R2 billion represented 6.4% of industry assets in 2014, against 8.2% of assets in 2013.

There was a relatively large increase in hedge fund assets managed by companies with total assets of between R2 billion and R5 billion, from 23.0% in 2013 to 28.2% this year.

None of the participating funds had assets of between R5 billion and R10 billion. Companies with assets in this range in the previous year were either managing assets exceeding R10 billion or had returned investor capital. Companies with assets of between R10 billion and R100 billion managed 29.1% of industry assets, from 21.7% in 2013. Asset managers with total assets of more than R100 billion saw their share reduced to 15.9% from 21.8% in 2013.

Hedge fund assets according to asset manager AUM

HEDGE FUND ASSETS

The bulk of hedge fund assets were still managed by companies that manage hedge fund assets exceeding R2 billion, accounting for 56.9% of the entire industry. Despite more than half the industry assets being managed by assets managers with hedge fund assets in excess of R2 billion this was a reduction from 68.2% in 2013. The decrease can be attributed to companies managing between one and two billion rand of hedge fund assets, increasing their share from 13.3% to 28.9% in 2014.

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

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% of hedge fund assets 2013 % of hedge fund assets 2014

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 8

Hedge fund assets

The South African hedge fund industry continued to mature with the percentage of total assets managed by managers with hedge fund experience exceeding ten years reaching 32.9% (18.3% of participating funds).

25.7% of assets were managed by managers with hedge fund experience of between eight and ten years (16.4% of funds) while managers with experience exceeding five years (but less than eight) managed 19.9% of industry assets (18.3% of funds).

This amounted to 78.6% of industry assets being managed by managers with hedge fund experience exceeding five years.

Assets of 12.9% were overseen by managers with experience of between three and five years (18.3% of funds), while 8.1% of assets (24.0% of funds) were managed by managers with experience of less than three years but exceeding one year. Only 0.4% of industry assets were managed by managers with hedge fund experience of less than one year.

Hedge fund assets of between R500 million but less than R1 billion amounted to 9.4% (8.4% in 2013) and assets of between R200 million and R500 million amounted to 5.1% (7.3% before).

A mere 1.3% of industry assets were managed by companies with hedge fund assets of between R100 million and R200 million, in line with 2013. Companies with assets of less than R100 million accounted for 1.4% of industry assets, similar to 2013.

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TRACK RECORD

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 9

Track record

There was a notable increase in the use of en Commandite partnership structures in the South African hedge fund landscape, from 60.3% of participants in 2013 to 67.8% in 2014. The increase can be attributed to funds changing their structures during the 12 months, particularly from debenture structures (which reduced from 30.5% to 18.2% of industry assets) and company structures (from 5.0% to 0.0%).

Hedge funds managed on a platform increased from 1.3% to 3.2%, while other type of trust structures housed 1.3% of industry assets. A further 6.2% of assets were in segregated funds and other types of trust structures.

Seven of the eight new funds used an en Commandite Partnership structure.

STRUCTURE

Structure

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< 1 year 1 - 3 years 3 - 5 years 5 - 8 years 8 - 10 years > 10 years

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 10

INVESTORS AND FEES

INVESTORS

Funds of hedge funds remained the largest allocators of capital to the local hedge fund industry but their share continued to decrease, from 63.0% in 2013 to 61.8% in 2014.

There was a marked increase from direct pension fund investments from 5.0% to 8.4% and similarly life funds increased exposure from 6.4% to 7.9%. It should be noted that these new allocations were mainly from offshore investors.

The allocation from high net worth individuals declined from 16.0% to 12.6% in 2014, with short-term insurers rising from 1.1% in 2013 to 1.6% this year.

Seeding and proprietary money remained unchanged at 6.0% of industry assets.

Investors

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DEALING FREQUENCY

The South African hedge fund market does not ordinarily have any initial lock-up fees associated to new investments. This was confirmed in this survey, with 98.4% of industry assets not subject to any initial lock-up fees. 0.1% of assets required a three-month lock-up, while 1.4% of assets required a six-month lock-up. None of the funds that participated indicated a lock-up exceeding six months.

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 11

The bulk of South African hedge funds required 30 days’ notice to accommodate redemptions. This is usually specified as a calendar month since dealing occurs on the first business day of the month.

There was a notable increase in funds that required 60 days’ notice for redemptions but this was mainly due to asset growth and not funds changing their redemption notice period.

Longer notice terms continued their downward path; funds with a 90-days’ notice reduced from 17.5% to 9.2% in 2014, while funds with longer notice terms reduced from 2.9% to 1.2% of industry assets.

Initial investment lock-up

Fund dealing frequency

The vast majority (99.8%) of South African hedge funds applied a monthly dealing period for investor redemptions and investment.

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 12

The average management fee charged by South African hedge funds according to assets under management showed a slight increase from 1.1% as at June 2013 to 1.2% by June 2014.

Funds charging a management fee of 1.5% of assets under management a year increased from 16.0% in 2013 to 21.6%. This was as a result of funds reporting this fee structure delivering strong positive performance, combined with new allocations and growing in relative size.

Funds charging a management fee of 2.0% a year remained moderately stable at 9.4% compared to 10.1% in 2014.

A 1.0% management fee was charged by the majority of the industry; 63.5% in 2014 compared to 65.1% in 2013.

South African hedge funds with a management fee structure of between 0.5% but less than 1.0% reduced slightly from 3.1% of assets to the current 2.8%. Funds with no management fee, but with a higher than normal performance fee, reduced from 6.4% to 2.0% in 2014.

Out of the new funds launched, half had a management fee of 1.0%, and funds with a higher management fee had a higher hurdle rate before any performance fees were taken.

Redemption notice period

FEES

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 13

The norm remained for hedge funds to charge a performance fee of 20%, with 87.3% of assets indicating this, an increase from 81.5% a year before. None of the participating funds indicated a performance fee of 30%. Funds with a performance fee of 25% reduced to 0.8% of assets, compared to 2.5% in 2013. The usual management fee charged by managers with a performance of 25% was lower than 1.0%.

17.5% remained the second most popular performance fee used by South African hedge fund managers with 8.5% of assets applying this against 10.0% in 2013. Lower performance fees remained relatively unchanged. Most new funds had a performance fee rate of 20%, with some applying a lower participation rate. However, these managers took performance fees on all positive performance as the hurdle rate commonly used was cash.

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Performance fee

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 14

Performance fee calculation methodology

There was an increase in the amount of assets that charged performance fees on a quarterly basis, from 43.0% in 2013 to 45.7% this year. This was the most popular method used for funds launched during the year with 75.0% indicating this. Funds with monthly crystallisation remained relatively unchanged with 1.5% of assets (1.7% the year before). No new funds launched during the year had a monthly performance fee crystallisation in place. A further 13.1% took performance fee half-yearly, compared to 12.7% in 2013. 39.0% took performance fees annually - an increase from 41.6%. Similar to June 2013 only 0.8% of industry assets had payments of performance fees longer than one year.

The most popular methodology for performance fee calculations was from zero but this is subject to the investor receiving a minimum return equal to the hurdle rate. 53.7% of assets indicated that the client received at least the hurdle rate and 75.0% of new funds also used this methodology. A further 33.2% of assets only took a performance fee above the hurdle, and 13.1% of funds indicated they took a performance fee on all positive performance.

Performance fee hurdle

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The most popular hurdle remained cash-related with 76.8% of industry assets indicating this (76.1% before). Funds that had a performance fee on all positive returns increased from 9.6% of industry assets in 2013 to 14.2% of assets.

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 15

Fund valuation

Fund valuation (asset pricing) was performed by outsourced service providers as indicated by 78.1% of industry assets while 18.5% of assets reported that this was performed both in-house and outsourced. Only 3.3% of participating assets reported fund valuation was performed solely in-house.

Crystallisation of performance fees

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OPERATIONS

FUND VALUATION AND CLIENT ADMINISTRATION

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Outsourced In-house and outsourced In-house

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RISK MONITORING AND COMPLIANCE

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 16

Client administration performed solely by an external service provider reduced to 75.8% of industry assets (from 83.4% a year before). It was performed both internally and externally by 21.6% of participating assets (16.4% a year before). A mere 2.6% of participants indicated that administration was performed solely in-house (0.2% a year before).

Client administration

A total of 59.0% of participating hedge funds indicated that FAIS monitoring was done externally (64.5% a year before) with a further 16.0% indicating this function was performed both internally and externally (an increase from 7.5%). A quarter of participating assets indicated that this function was only performed internally.

FAIS monitoring

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Mandate compliance monitoring was performed by an external service provider for 47.3% of participating assets (38.9% in 2013) while 40.3% of hedge fund assets indicated that the function was carried out internally and externally. 12.4% of participating assets indicated that compliance monitoring was performed internally only, down remarkable from 30.6%.

Mandate compliance monitoring

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Outsourced In-house and outsourced In-house

40.5% of industry assets indicated that risk management was outsourced (36.3%). A further 39.7% indicated that the function was performed both internally and outsourced, with 19.8% indicating it was performed internally.

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Outsourced In-house and outsourced In-house

Portfolio risk monitoring

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 18

Similar to the previous reporting period, 60.0% of participating assets allowed daily viewing access of portfolio holdings (58.7% in 2013). Managers that allowed weekly transparency dropped to zero, compared to 1.6% a year earlier.

Assets amounting to 31.5% allowed monthly viewing (28.5% a year before) and a further 2.0% only disclosed holdings quarterly. There were no funds indicating that disclosure was only allowed annually and a mere 1.1% allowed transparency occasionally (2.4% in 2013).

PORTFOLIO TRANSPARENCY

PRIME BROKER

There was a prominent increase in the use of a second prime broker, with 26.1% of participating assets indicating this, an impressive increase from the previous year’s 16.9%. This resulted in funds with only one prime broker declining to 63.0% (previously 72.1%).

While funds that did not use a prime broker remained relatively unchanged at 10.9% compared to 11.1% a year before, these funds are normally within the larger asset manager houses. All new funds launched during the year utilised the services of a prime broker.

Prime broker

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One More than one No

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 19

Performance dispersion

Portfolio holding transparency

STRATEGIES

EQUITY LONG/SHORT

The average compound return of the equity long/short strategy exceeded 20.0% over the 12 months ending June 2014, compared to the JSE All Share Index delivering 32.7% over the same time frame. Equity long/short strategies achieved their returns with significant lower equity market exposure and at lower levels of volatility. This is also highlighted in the relative dispersion of monthly returns achieved by participating hedge fund managers.

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70%

Daily Weekly Monthly Quarterly Annually Occasionally

Jun'12 Jun'13 Jun'14

100

102

104

106

108

110

112

114

116

118

120

122

-15%

-10%

-5%

0%

5%

10%

15%

41450 41500 41550 41600 41650 41700 41750 41800

Com

pou

nd g

row

th o

f R10

0

Mon

thly

disp

ersio

n of

ma

nage

r ret

urns

Manager monthly return Average compound return

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 20

Average gross exposure

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

0% to 50% 50% to 100% 100% to 150% 150% to 200% 200% to 300% > 300%

Jun'12 Jun'13 Jun'14

Of participating equity long/short hedge fund managers, only 0.1% reported an average net exposure to the equity market of between -10% and -50%, in line with 2013.

A further 0.6% indicated average equity exposure of between 0% and 10% (zero in 2013). 24.8% indicated exposure to the equity market of between 10% and 50% - similar to 24.8% the year before.

Strategy assets amounting to 65.4% maintained equity exposure of less than 100% but more than 50% (74.0% in 2013). A further 5.8% of equity long/short managers had average exposure of more than 100% but less than 150.0% (0.1% in 2013). 3.5% of strategy assets indicated average exposure to the equity market between 150% and 200%.

Average net equity exposure

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

-50% to -10% -10% to 0% 0% to 10% 10% to 50% 50% to 100% 100% to 150% 150% to 200%

Jun'12 Jun'13 Jun'14

There was a decrease in the average gross exposure of equity long/short hedge fund assets in the industry. This was most notable in the 150% to 200% range, 53.9% in 2014 against 60.9% of strategy assets indicating this in 2013. This resulted in average gross exposure of between 100% and 150% increasing from 27.6% of strategy assets to 34.6%. Most of the other ranges remained in line with the previous year.

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 21

EQUITY MARKET NEUTRAL

Performance dispersion

Despite a relatively difficult market environment over the last couple of years resulting in several funds closing, the equity market neutral strategy delivered strong results for the 12 months to June 2014. Over this time frame the strategy delivered returns exceeding 12.0% compared to 9.7% 12 months earlier.

There was a notable increase in the average trading activity of the equity long/short strategy, with a decrease in zero to two times (from 63.7% to 52.2%) and an increase in two times to four times (13.4% to 26.5%).

Strategy assets that turned their fund four to six times the value of the fund’s NAV increased from 2.5% to 9.8%. Strategy assets that turned between six and eight times the fund’s NAV halved from 15.7% to 6.7% but eight times to ten times increased from 2.7% to 4.8%. There was a significant decrease in strategy assets that reported trading in excess of ten times the NAV.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

0 - 2X fund NAV 2X - 4X fund NAV 4X - 6X fund NAV 6X - 8X fund NAV 8X - 10X fund NAV > 10x fund NAV

Jun'12 Jun'13 Jun'14

Trading activity

100

102

104

106

108

110

112

114

-6%

-4%

-2%

0%

2%

4%

6%

8%

Jun'13 Aug'13 Oct'13 Nov'13 Jan'14 Mar'14 Apr'14 Jun'14

Com

pou

nd g

row

th o

f R10

0

Mon

thly

disp

ersio

n of

ma

nage

r ret

urns

Manager monthly return Compound average return

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 22

The most common gross exposure maintained by the equity market neutral strategy was between 100% and 150%, with 62.2% of strategy assets (72.6% in 2013). A further 27.3% of strategy assets indicated gross exposure exceeding 150% but less than 200%.

Average gross exposure

0%

10%

20%

30%

40%

50%

60%

70%

80%

0% to 50% 50% to 100% 100% to 150% 150% to 200% 200% to 300% > 300%

Jun'12 Jun'13 Jun'14

Equity market neutral hedge funds maintained relatively low exposure to the equity market with 48.5% of strategy assets indicating equity exposure of between 0% and 10%, and a further 51.5% indicating exposure exceeding 10% but less than 50%.

Average net equity exposure

0%

10%

20%

30%

40%

50%

60%

70%

-100% to 0% 0% to 10% 10% to 50% 50% to 100%

Jun'12 Jun'13 Jun'14

There was a prominent increase in trading activity for the equity market neutral strategy. Assets trading less than two times fund NAV dropped from 45.8% to 10.7%. Assets within the strategy trading between two to four times their portfolio value increased from 12.8% to 38.2%, whilst strategy assets that traded their portfolios four and six times increased to 16.7%. None of the participating funds indicated this option in 2013.

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 23

FIXED INCOME HEDGE

Performance dispersion

Returns of 10.0% compared well to the previous 12 months when returns of only 4.6% were achieved.

Trading activity

Equity market neutral fund assets that traded their funds between six and eight times fund NAV remained relatively unchanged from 2013 at 3.0% (3.8% in 2014).

A total of 28.0% of strategy assets indicated that trading activity ranged between eight and ten times, compared to zero a year earlier. Funds with trading activity exceeding ten times dropped from 38.4% to 2.6%.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

0 - 2X fund NAV 2X - 4X fund NAV 4X - 6X fund NAV 6X - 8X fund NAV 8X - 10X fund NAV > 10x fund NAV

Jun'12 Jun'13 Jun'14

98

100

102

104

106

108

110

112

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Jun-13 Aug-13 Oct-13 Nov-13 Jan-14 Mar-14 Apr-14 Jun-14

Com

pou

nd g

row

th o

f R10

0

Mon

thly

disp

ersio

n of

ma

nage

r ret

urns

Manager monthly return Average compound growth

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 24

MULTI-STRATEGY

Performance dispersion

Multi-strategy hedge funds achieved returns of almost 18.0%, compared to 7.7% during the 12 months from July 2013 until June 2014.

There was a prominent shift in the trading activities of fixed income hedge fund managers according to strategy assets under management. Fixed income funds trading their portfolios less than two times fund NAV dropped from 56.6% to 27.4%.

Strategy assets that traded their portfolios more than two times but less than four times doubled from 4.1% to 9.5%, while four to six increased from 0.1% to 21.8%.

Six to eight times portfolio value doubled from 6.3% to 14.5% and strategy assets that traded their portfolios eight to ten increased from 2.5% to 10.4%. There was a noticeable decrease in strategy assets that traded portfolios more than ten times from 30.5% to 16.3%.

Trading activity

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

0 - 2X fund NAV 2X - 4X fund NAV 4X - 6X fund NAV 6X - 8X fund NAV 8X - 10X fund NAV > 10x fund NAV

Jun'12 Jun'13 Jun'14

102

104

106

108

110

112

114

116

118

120

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Jun-13 Aug-13 Oct-13 Nov-13 Jan-14 Mar-14 Apr-14 Jun-14

Manager monthly return Average compound return

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 25

Most multi-strategy fund assets indicated trading activity of between two times and four times fund NAV, as indicated by 58.5% of strategy assets (compared to 16.9% in 2013). Other popular options included four times to six times (19% of assets) and zero to two times (17.4%).

Average gross exposure

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0% to 50% 50% to 100% 100% to 150% 150% to 200% 200% to 300% > 300%

Jun'12 Jun'13 Jun'14

52.4% of strategy assets indicated that their portfolios had average equity exposure during the 12 months of between 10% and 50% - a significant drop from the previously recorded 82.4%. A further 29.4% had an average equity exposure of less than 100% but more than 50%.

Average net equity exposure

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

-100% to 0% 0% to 10% 10% to 50% 50% to 100% 100% to 150% 150% to 200%

Jun'12 Jun'13 Jun'14

The bulk of multi-strategy assets indicated an average gross exposure of 39% (27.9% in 2013), while the second most popular exposure level (25.2% compared with 2013’s 26.9%) was between 50% and 100%.

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2014 . 26

Trading activity

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

0 - 2X fund NAV 2X - 4X fund NAV 4X - 6X fund NAV 6X - 8X fund NAV 8X - 10X fund NAV > 10x fund NAV

Jun'12 Jun'13 Jun'14

CLOSING REMARKSSouth African hedge fund assets, which reached an all-time high during 2014, look set to show continued growth as retail investors increasingly consider including hedge fund strategies in their portfolios.

The local hedge fund industry is well positioned to take advantage of proposed new regulation. One benefit of being fully regulated is that hedge funds are likely to become more mainstream, having previously been the preserve mainly of institutions and high net worth individuals.

Amongst the advantages of the new regulations is the promotion of integrity and enhanced transparency.

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1

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information produced in this document is based on information received from third parties that have not

necessarily been verified by Novare Investments or by another independent party. Information is

reported on an aggregate basis without disclosing any particular asset manager information. While the

information contained herein has been obtained from sources believed to be reliable, Novare

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Hedge funds are unregulated financial products and do not comply with the provisions of the Collective

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and Intermediary Services Act No 37 of 2002. FSP No. 757