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SOUTH AFRICA HEDGE FUND SURVEY 2015

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Page 1: SOUTH AFRICA HEDGE FUND SURVEY 2015 - Novare€¦ · two times gross exposure or 20% value-at-risk; ... Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08 Jun'09 Jun'10 Jun'11 Jun'12

SOUTH AFRICAHEDGE FUND SURVEY 2015

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FOREWORD 2

HIGHLIGHTS 3

HEDGE FUND REGULATION 3

ASSETS UNDER MANAGEMENT 5

INVESTOR PROFILE 10

TRACK RECORD 11

STRUCTURE 12

OPERATIONS 13

FEES 16

STRATEGIES 20

INDUSTRY PROSPECTS 28

CONCLUSION 29

CONTACT DETAILS 30

DISCLAIMER 30

CONTENT

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 1

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FOREWORD

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 2

This edition marks the twelfth year of the Novare Investments South African Hedge Fund survey. Over the years, we have had the privilege of being at the forefront of new industry developments, navigating some of the toughest hedge fund environments and also capturing each milestone.

The objective of this survey is to provide an overview of the South African hedge fund industry with a focus on assets, strategies, leverage and performance. This year we included commentary on important hedge fund regulations recently introduced by the Financial Supervisory Board (FSB) and currently in the implementation phase.

Following the 2008 global financial crisis, the Group of Twenty countries (G20) of which South Africa is a member held a summit in Pittsburg where leaders agreed to regulate privately pooled funds including hedge funds¹ . They identified that hedge funds engaged in increasingly complex and opaque financial products, coupled with the use of leverage. This combination resulted in increased vulnerability in the financial sector, which regulators did not adequately understand or address with their policies. The aim of new regulation is to provide protection to investors in hedge funds while simultaneously promoting the integrity of the industry and enhancing transparency. Regulation is also designed to assist with monitoring and managing systemic risk.

Although the South African hedge fund industry is small compared to its global counterpart, which has assets under management in excess of USD 3 trillion² , the adoption of the new regulation brings the domestic industry in line with standards in the global financial market.

This survey provides a more detailed account of regulation in the South African context, as well as its likely future impact. Participants have also shared their intentions regarding how they plan to structure their offerings under the new dispensation.

This year a total of 53 asset managers, collectively managing over 111 uniquely mandated hedge funds, were surveyed. Participation is voluntary and the survey focuses solely on South African domiciled hedge funds that invest predominantly in South African financial markets.

The intention of this hedge fund survey is to provide key insights into the industry, mainly highlighting changes in the 12 months up to 30 June 2015.

All data is expressed as a percentage of the total industry or strategy assets under management, unless stated otherwise.

¹(Department of National Treasury, 2014)²(Lyxor research, 2015)

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HIGHLIGHTS

• Most participants outperformed the local equity and bond markets• The average compound return of the equity long/short strategy over the 12 months was 14.7% whereas the local equity market returned roughly 3.7% over same period.

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 3

HEDGE FUND REGULATIONHighly anticipated hedge fund regulation was released in February 2015 as a separate pillar under the Collective Investments Schemes Control Act (CISCA) which encompasses unit trusts. All South African hedge fund managers will be required to appoint a management company. Themanagement company will be responsible for the registration of the hedge fund in accordance with CISCA. A hedge fund, as defined under section 63 of the Collective Investment Schemes Control Act, 2002 (Act No. 45 of 2002), is:

an arrangement in pursuance of which members of the public are invited or permitted to invest money or other assets, which uses any strategy or takes any position which could result in the arrangement incurring losses greater than its aggregate market value at any point in time and which strategies or positions include but are not limited to – (a) leverage; or (b) net short positions.

The development to classify hedge funds as collective investment schemes places the oversight and supervision of these financial products under the jurisdiction of the FSB.

Some of the resultant requirements for hedge funds include additional reporting both to investors and to the FSB, enhanced risk monitoring practices as well as independent trustee oversight. A manager must establish, document, maintain and enforce a risk management policy, which must provide for the daily management of operational risk, business risk, liquidity risk and credit-counter party risk.

³(Department of National Treasury, 2015)

IndustryProfile

AUM

Performance

Operations

• R62.0 billion of assets under management• Equity long/short continued to dominate as the strategy with the most assets

• 16 new funds launched• One of 2014’s top 10 funds was dissolved• The most popular fee combination structure is a 1% management fee and a 20% performance fee• Over 75% of hedge fund assets are managed by firms with over R5 billion in total assets

• More than 90% of asset administration is outsourced to two service providers

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A tiered approach has been adopted by the regulation, with the establishment of two types of hedge funds, one for retail investors and the other for qualified investors. A Qualified investor, as defined by the FSB Board Notice 52 of 2015 , is: any person who invests a minimum investment amount of R1 million per hedge fund and who – (a) has demonstrable knowledge and experience in financial and business matters which would enable the investor to assess the merits and risks of a hedge fund; or (b) has appointed a Financial Services Provider (FSP) who has demonstrable knowledge and experience to advise the investor regarding the merits and risks of a hedge fund investment.

A retail investor hedge fund is defined as a hedge fund in which any investor may invest because it meets the requirements set out by the FSB.

The two types of hedge funds are regulated differently, with the Retail Investor Hedge Funds (RIHF) regulated more stringently than the Qualified Investor Hedge Funds (QIHF). While both provide sufficient investor protection, distinct differences include:

▪ Qualified Investor Hedge Funds may set their own level of exposure or value-at-risk (with approval from the FSB). This is restricted for Retail Investor Hedge Funds to a maximum of two times gross exposure or 20% value-at-risk;

▪ Qualified Investor Hedge Funds need to provide liquidity to investors within three calendar months whilst Retail Investor Hedge Funds need to provide monthly liquidity;

▪ Retail Investor Hedge Funds are not permitted to invest in immovable property, a portfolio of a Qualified Investor Hedge Funds or a private equity fund.

(Financial Services Board, 2015)

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 4

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ASSETS UNDER MANAGEMENT

Assets under management by the South African hedge fund industry reached R62.0 billion on 30

June 2015, showing a 15.8% increase from the previous year. The surge in assets can largely be

attributed to performance during the 12-month period. Net capital inflows contributed R4.6 billion.

While this is slightly less than the previous 12 months to June 2014, when net inflows amounted to

R5.1 billion, the total assets figure illustrates the strong investment performance delivered during the

12-month period under review.

However, these inflows were still marginal when compared to the local Collective Investment

Scheme industry, which received net inflows of R77 billion during the same time frame, taking total

assets to R1.8 trillion5.

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 5

5(Association for Savings and Investment South Africa (ASISA), 2015)

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

R 62,096

R0

R10,000

R20,000

R30,000

R40,000

R50,000

R60,000

R70,000

Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08 Jun'09 Jun'10 Jun'11 Jun'12 Jun'13 Jun'14 Jun'15

R m

illion

Industry assets

Of net capital inflows:

• Hedge funds with total assets of between R200 million and R500 million received

net inflows that increased significantly from R208.0 million in 2014 to R951.6 million in 2015.

• More than 74.0% of inflows were allocated to managers managing more than

R1 billion worth of hedge fund assets.

• Funds managing less than R100 million as well as funds between R500 million and R1 billion

of assets experienced marginal outflows.

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Despite increased consolidation over recent years that lead to hedge funds being dissolved or

capital returned to investors, the amount of funds that dissolved or returned investor capital

reduced from seven in 2014 to six during the measured period. This is the lowest level in almost 10

years.

In addition, the number of new funds launched increased despite the relatively muted

environment for new strategies over the last five years. In the period under review, 16 of the new

funds were launched by 14 different asset managers. Thirteen of the asset manager already

managed hedge fund products in their company, in 2015 there was one new hedge fund asset

manager. In total, the new funds accounted for R1.4 billion of additional assets undermanagement

as of 30 June 2015. There was no clear preferred strategy among the new launches, but eight of

the funds were equity focused.

During the period, a total of six funds were dissolved, returning investor capital. These funds

managed a total of R2.1 billion of assets as of June 2014. Reasons for dissolving funds include a loss

of assets due to underperformance or managers wanting to focus on other parts of the business.

During the period, one of the industry’s largest funds in terms of assets under management closed.

The fund accounted for 80.0% of the assets of total dissolved funds. Owing to the small size of the

local industry, when a large fund closes, the impact is much more evident, altering the composition

and distribution of industry assets.

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 6

Net cash flow according to total assets in fund

-1000

-500

0

500

1000

1500

2000

2500

3000

3500

4000

> R 1 billion R 500 to R1 billion R 200 to R500 million R 100 to R200 million < R100 million

R m

illion

Jun'12 Jun'13 Jun'14 Jun'15

NEW FUNDS AND DISSOLVED FUNDS

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 7

CAPACITY

Out of the funds surveyed, 7.1% of the funds were hard closed, meaning that no further capital

would be accepted, and 9.5% of funds were soft closed - only accepting money from current

investors. Funds that housed 83.4% of industry assets had the scope for additional capacity,

meaning they are willing to accept further capital from investors. Over the years capacity has

increased which could indicate that hedge fund managers are more comfortable with managing

larger asset bases. This increase can also be seen as a function of market breadth and depth.

ASSETS BY STRATEGY

Equity long/short is still the favoured strategy with total assets up marginally from 59.9% in 2014 to

60.9% in 2015. This strategy represented R37.8 billion of total assets.

The fixed income strategy rebounded in 2015 after contracting in size by 4.1% in 2014. It regained

2.5% of total hedge funds’ assets in last 12 months under review to represent 14.1% of assets.

Despite the percentage decline of total assets over the last four years, there has been a pick-up in

equity market neutral strategies, which increased from 7.1% to 8.7% of industry assets.

Hedge funds that predominantly invest in commodities, also demonstrated a meaningful increase

in percentage of total assets, from 2.1% to 3.7% in 2015. This was mainly driven by strong

performance.

Strategies referred to as “other” include listed property, managed futures, tactical trading,

quantitative funds and CTA strategies. These strategies represented 4.1% of total industry assets in

2014 and in 2015 they declined to 1.3%. This was largely due to a fund that was dissolved during the

period.

Strategies

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jun'04 Jun'05 Jun'06 Jun'07 Jun'08 Jun'09 Jun'10 Jun'11 Jun'12 Jun'13 Jun'14 Jun'15

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

Volatility arbitrage Structured finance Commodities Other strategies

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During the last few years the equity long/short strategy has received the bulk of capital inflows. It

also had substantial net inflows over the reviewed period of R2.1billion (excluding dissolved

funds).

While we acknowledge the stable inflow into the structured finance strategy, under the new

regulation this strategy does not meet the hedge fund criteria as set out by the FSB. As a result, it

will not be classified as a hedge fund once the regulation is enacted and will, in future, be

excluded from the survey.

Dissolved funds were mostly from other strategies with figures being skewed, due to size, by a single

fund which was dissolved.

Last year the fixed income strategy had a net outflow, but this year it attracted in excess of R1.2

billion in net inflows. Commodities had a net outflow with a relatively small fund of some R13 million

dissolved. The strategy also had one new entrant in the period.

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 8

Asset flow by strategy

-4000 -3000 -2000 -1000 0 1000 2000 3000 4000 5000 6000

Equity long/short

Equity market neutral

Fixed income hedge

Multi-strategy

Commodities

Structured finance

Other

R million

Inflows Outflows Dissolved Fund

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 9

ASSET MANAGER PROFILE

Over recent years, most South African hedge fund asset managers have diversified their asset base

and no longer solely rely on managing hedge funds. This has lead to hedge funds forming part of

larger asset management companies. The figures below include all assets managed, consisting of

local and offshore, as well as traditional assets classes and hedge funds.

In 2015, 42.8% of the hedge fund assets were managed by asset managers with total assets under

management of R10 billion to R100 billion, this is an increase of 13.7% from the previous year.

Asset managers with R5 billion to R10 billion, managed 22.3% of the hedge funds and those with

more than R100 billion managed 10.5% of assets. This infers that 75% of assets are with firms which

have over R5 billion in total assets under management and that the bulk of South African hedge

fund assets are managed by firms that have a substantial asset base.

Asset manager total assets

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

More than R100 billion

Between R10 and R100 billion

Between R5 and R10 billion

Between R2 and R5 billion

Between R1 and R2 billion

Between R500 million and R1 billion

Less than R500 million

% of hedge fund assets 2013 % of hedge fund assets 2014 % of hedge fund assets 2015

When considering total hedge fund assets of the respective asset managers, there has been a

significant increase in managers with hedge fund assets of over R2 billion. In 2015 these accounted

for 74.9% compared to 56.9% in 2014. This rise was largely due to funds that had between R1 billion

and R2 billion in assets under management in the previous year having grown their asset base.

Historically, some local managers were averse to managing bigger asset bases as this would have

impacted their ability to execute trades timeously. With the noticeable growth in fund sizes,

capacity does not seem to be a concern any more.

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 10

Hedge fund assets

0%

10%

20%

30%

40%

50%

60%

70%

80%

< R100m [R100m;R200m) [R200m;R500m) [R500m;R1bn) [R1b;R2bn) >R2bn

Jun'12 Jun'13 Jun'14 Jun'15

INVESTOR PROFILE

The principal allocators of capital to the hedge fund industry remained funds of hedge funds, which allocated 57.3% of industry capital - a decrease of 4.37% in the allocation made last year. There was substantially more interest from high net worth individuals who increased their allocation to hedge funds from 14.1% in 2014 to 26.4% in 2015.

There was a sharp drop in allocation from pension funds, which had an allocation of 8.4% in 2014 versus only 0.1% by June 2015. This was mainly driven by the large fund which was dissolved with an investor base made up mainly of pension funds.

Seeding and proprietary increased by 0.8% from 6.0% in 2014 which was primarily due to the new hedge fund asset manager with a new hedge fund offering.

As at 30 June 2015, the ten largest hedge funds represented 42.5% of total hedge fund assets amounting to R26.3 billion. The top 10 funds, according to assets under management, have been able to consistently capture the growth in the industry, having maintained 40.0% or more of the industry since 2012.

The 20 largest funds account for 65.9% of industry assets while 77.8% of assets are held by the 30 largest funds measured by assets. This indicates significant levels of concentration in the industry where 22.2% (R13.7 billion) of the industry’s R62.0 billion in assets, is distributed amongst the remaining 81 funds.

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Source of funds

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 11

TRACK RECORDLooking at the hedge fund experience of portfolio managers, 39.8% of total industry assets were managed by managers with hedge fund experience exceeding 10 years, compared to 32.9% in 2014.

The data showed that 52.2% of hedge funds were managed by managers with experience of more than five years. This was down from 78.6% in 2014.

The equity long/short strategy had the most experienced fund managers, 62.4% of whom had more than five years of experience.

Track record

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

% AUM

% of funds

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

0%

10%

20%

30%

40%

50%

60%

70%

Funds of funds Pension funds Life funds High net worth individuals Short term insurers Seeding/Proprietary

Jun'12 Jun'13 Jun'14 Jun'15

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

en commandite partnership Debenture structure Trust Note Platform Other

Jun'12 Jun'13 Jun'14 Jun'15

Structure

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 12

In line with new regulation, only certain structures are allowed within the CIS environment. A portfolio can only use the following structures for its hedge fund assets

• A collective investment scheme trust arrangement as contemplated in the Act; or

• An en commandite partnership

An en commandite partnership is a partnership where the en commandite partner’s (the partner whose name is undisclosed) liability towards co-partners of the partnership is limited to the specified capital amount which the en commandite partner has contributed or undertaken to contribute to the partnership. The en commandite partner is not at risk of suffering a loss or liability in excess of its investment in or contractual commitment to the partnership.

It is thus no surprise that the use of the en commandite partnership structure increased by 10% from 67.8% to 77.8% of industry assets for the year as hedge fund managers aligned their offering to the new regulations.

This is the largest year-on-year increase and shows a distinct migration to this structure which will remain acceptable in the regulatory framework. To be consistent with the new regulation, 22.2 % of the funds surveyed would either have to change their structure to an en commandite partnership, or a trust.

STRUCTURE

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 13

OPERATIONS

REPORTING AND DEALINGS

Provisions • A vast majority (96.9%) of funds had no initial investment lock-up period.

Only 3.1% of hedge fund assets subject investors to an initial lock up period.

• A mere 14.5% of participating assets allowed ring-fencing of assets

• A further 15.4% had gating provisions

• Some 28.2% allowed for in specie redemption

• Suspension provisions were allowed by 20.8% of assets

• 12.3% of the funds allowed side pocketing

• A mere 8.9% of South African hedge funds, according to assets under

management, were permitted to impose a redemption penalty or exit fee

Dealings • The preferred fund dealing frequency remained monthly with 99.7% of the

funds having monthly dealings. When we look back to 2008, only 78.6% of

the funds were trading monthly with 5.3% dealing daily

• Consistent with the monthly dealing frequency, 90.4% of the funds required a

redemption notice period of 30 days, up from 75.8% in 2014. This upward trend

was supported by the significant drop in 60 and 90 days’ notice periods, from

11.7% to 2.8% and 9.0% to 6.8% respectively. In 2015 there were no funds

requiring longer than 90 days’ notice period. With the new regulation 90.4% of

participating hedge fund managers will meet the redemption notice period

as set out for the retail hedge fund from the recently promulgated hedge

fund regulation

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 14

ASSET ADMINISTRATION

The survey shows that 85.9% of asset administration, which is the valuation of portfolio instruments,

is outsourced - up from 76.9% in the previous period. There was a decrease in the use of in-house

services from 4.8% in 2014 to 0.1% in 2015. The remaining percentage was for the combined inhouse

and outsourced asset administration.

The leading outsourced service provider covers 63.0% of the market and the second largest has a

31.0% market share, meaning that 94.0% of the outsourced asset administration is dominated by

Compliance monitoring

LIABILITY ADMINISTATION

The outsourcing of liability administration (investor ledger) increased from 75.8% in 2014 to 88.2% in

2015. Those who preferred partial in-house and outsourced services, reduced significantly from

21.6% to 8.8%.

The two leading service providers captured 74.1% market share.

RISK MONITORING AND COMPLIANCE

While new regulations introduce the oversight of hedge fund products, hedge fund asset

managers have been regulated as managers since 20096. Financial advisory and intermediary

services compliance monitoring was outsourced for 54.9% of industry assets, down from 59.0% in

2014. This indicates that managers increasingly opted to co-manage this function given an

increase in combined in-house and outsource services from 16.0% to 23.7%.

0%

10%

20%

30%

40%

50%

60%

70%

Outsourced In-house and outsourced In-house

Jun'12 Jun'13 Jun'14 Jun'15

6(National Treasury, 2014)

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Most managers preferred to perform their risk monitoring by combining in-house and outsourced

services (61.4%), which is a significant jump from 2014 when only 39.7% preferred this. Of the

participants, 15.2% outsource risk monitoring to their prime brokers.

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 15

Risk monitoring

Prime Broker

0%

10%

20%

30%

40%

50%

60%

70%

Outsourced In-house and outsourced In-house

Jun'12 Jun'13 Jun'14 Jun'15

Currently 9.2% of South African hedge fund assets do not utilise the services of a prime broker. These

funds are run mostly by larger asset managers who are able to perform the function in-house.

Although in previous years there was a trend towards using multiple prime brokers, this reversed in

2015.

Three prime brokers are the preferred firms which account for 72.0% of the industry.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

One More than one No

Jun'12 Jun'13 Jun'14 Jun'15

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 16

PORTFOLIO TRANSPARENCY

While transparency is one of the key elements of the new regulations, as was the case in previous

periods. Most local hedge funds remained transparent, with 57.1% of funds disclosing actual

holdings to investors on a daily basis. There was an increase in managers who reveal actual

holdings occasionally, from 1.1% to 16.0%.

Holding transparency

Of the 16 new funds launched during the year to June 2015, one charged a management fee of

2.0%, two charged 1.5% with the remainder all charging 1.0%. In general, there were marginal

changes in annual management fees. There was a 2.7% increase in funds charging a 2.0% due to

those funds having grown their respective asset bases. The majority of managers (62.0%) charge

1.0%.

0%

10%

20%

30%

40%

50%

60%

70%

Actual daily Actual weekly Actual monthly Actual quarterly Actual annually Occasionally None

Jun'12 Jun'13 Jun'14 Jun'15

FEES

Management fee

0%

10%

20%

30%

40%

50%

60%

70%

80%

0% p.a. (performance feeonly)

0.50% - 1% p.a. 1% p.a. 1.5% p.a. 2% p.a.

Fee

Jun'12 Jun'13 Jun'14 Jun'15

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With the exception of one fund, all other newly launched funds charged a performance fee of 20.0% above a hurdle rate. Funds charging 20.0% performance fees increased from 87.5% in 2014 to 93.8% in 2015.

The number of funds charging 17.5% performance fees decreased from 8.4% in 2014 to 1.2% in 2015. Overall local hedge fund managers gravitate towards a fee structure of a 1.0% annual management fee and a 20.0% performance. This combination represents 52.2% of the managers.

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 17

Performance fee

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

10.0% 15.0% 17.5% 20.0% 25.0% 30.0%

Jun'12 Jun'13 Jun'14 Jun'15

There was an increase in funds charging a performance fee on all positive performance from 13.2% in 2014 to 16.4% 2015. Funds using cash as a hurdle for performance decreased from 78.0% to 70.7% in 2015.

Performance fee hurdle

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

On all performance 10% Cash Cash + fixed hurdle Inflation Inflation + fixed hurdle Other

Jun'12 Jun'13 Jun'14 Jun'15

PERFORMANCE FEES

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There was an increase from 31.4% in 2014 to 34.2% in funds using the hurdle rate to calculate performance fees, and a substantial decrease of 6.9% in funds calculating the performance fee from zero, once the return exceeded the hurdle rate.

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 18

Performance fee calculation methodology

The crystallisation frequency refers to how often the fund manager is paid the performance fee. Of the participants, 46.3% indicated a quarterly crystallisation of performance fees and 42.1% indicated annual crystallisation of fees. Crystallisation of longer than a year was 5.7%, compared to 0.8% the previous year.

0%

10%

20%

30%

40%

50%

60%

From zero but client receives at least the hurdle rate From the hurdle rate itself On all performance

Jun'12 Jun'13 Jun'14 Jun'15

Crystallisation of performance fees

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Monthly Quarterly 6-monthly Annually Longer than 1 year

Jun'12 Jun'13 Jun'14 Jun'15

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Participants representing 90.6% of hedge fund industry assets have an uncapped total performance fee. This means there is no level after which further performance fees are no longer paid. Only six funds (representing 9.4% of assets) participating in the survey, had a cap on their performance fees.

Funds representing 15.9% of industry assets are subject to claw back provisions in their respective subscription agreements. Claw back provisions allow an investor to take back performance fees that have already been paid to the hedge fund manager if the manager does not deliver on the terms of the subscription agreement - in other words, not delivering on the performance objective. Claw back provisions are customary in the private equity industry locally and abroad and have been put in place to better align managers' remuneration with the realisation of profits.

In terms of new regulations managers will be subject to CISCA guidelines relating to minimum information that must be provided to clients in respect of fund performance fees.

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 19

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0%

10%

20%

30%

40%

50%

60%

70%

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

Jun'12 Jun'13 Jun'14 Jun'15

STRATEGIESThe figures below are a percentage of strategy assets.

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 20

Average net equity exposure

EQUITY LONG/SHORT

There was a notable increase in strategy assets that maintained an equity exposure of less than

zero percent to 0.9% compared to 0.1% in the previous period. No participating equity long/short

hedge fund managers had exposure to the market of between 0% and 10.0%. Of the managers,

25.3% had average net equity exposure of between 10% and 50%, which was in line with 2014 at

24.8%. A majority of 71.6% of the equity long/short strategies had a net exposure of between 50%

and 100%. Only 2.1% of strategy assets maintained exposure to the market exceeding 100%.

0%

10%

20%

30%

40%

50%

60%

70%

80%

-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 Jun'15

Under the new regulations retail hedge funds will be limited to 200% of gross exposure, or a 20%

Value at Risk limit. A total of 87.6% of participating equity long/short hedge fund managers’ assets

would meet this gross exposure regulatory limit. In 2015, 53.0% of equity long/short funds reported

average gross exposure of 150% to 200%, and 22.3% had gross exposure of 100% to 150%.

Average gross equity exposure

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Equity long/short hedge fund managers reduced their relative trading activity during the period

under review there was an increase in funds trading on average zero to two times the fund’s net

asset value (NAV) from 52.2% to 81.4%.

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 21

Trading activity

Performance dispersion

Despite heightened volatility in the local equity market, the equity long/short strategy faired

relatively well over the 12 months when the average compound return was 14.7% against the 3.7%8

achieved by the FTSE/JSE All Share Index.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

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 Jun'15

8(Inet, 2015)

96

98

100

102

104

106

108

110

112

114

116

118

-10%

-5%

0%

5%

10%

15%

20%

Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15

Com

pun

d g

row

th o

f R10

0

Mon

thly

disp

ersio

n of

ma

nage

r ret

urns

Manager monthly returns Average long/short return ALSI

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 22

EQUITY MARKET NEUTRAL

The equity market neutral strategy maintained low average equity exposures of between 0% and

50%, with 43.0% of managers having between 0% and 10% net equity exposures. Of the managers

involved with this strategy, 54.7% had on average 10% to 50% net equity exposures.

Average net 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 Jun'15

A significant 94.4% of equity market neutral strategy assets met the retail hedge fund criteria of

maintaining gross exposure of less than 200%. In the period under review 4.1% of the strategy’s

assets had gross exposure of between 200% and 300%, while a further 1.5% of strategy assets

maintained an average gross exposure of more than 300%.

Average gross equity 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 Jun'15

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 23

Trading activity

Despite increased volatility in local financial markets, the equity market neutral strategy on aver-

age returned strong results of 9.9%, delivering a market outperformance of 6.2%.

Performance dispersion

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

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 Jun'15

On average, equity market neutral strategies, traded more than their equity long/short peers, with

35.5% of strategy assets trading zero to two times the fund’s NAV over the year. There was a drop

from 38.2% to 23.6% in trading of between two and four times. Funds that traded between eight to

10 times their values declined significantly from 28.0% to 1.5% of strategy assets. Funds trading

between six to eight times increased from 3.8% to 22.2%. Relative to last year, equity market neutral

funds traded less this year.

R 98

R 100

R 102

R 104

R 106

R 108

R 110

R 112

-6%

-4%

-2%

0%

2%

4%

6%

8%

Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15

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 market neutral return

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 24

FIXED INCOME

Trading activity

Over the period there was an increase in trading of two to four times fund NAV from 9.5% to 30.3%,

with the new fixed income fund also falling into this range.

Over the years, we have seen a decline in fixed income strategy assets trade of more than 10 times

fund NAV, and this dropped by a further 2.9% in 2015. There was a noticeable trend of less frequent

trading in the strategy compared to previous periods.

0%

10%

20%

30%

40%

50%

60%

70%

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 Jun'15

Fixed income strategies delivered an average 7.7% return, although with a higher manager disper-

sion than the previous year when the average return was 10.0%. The All Bond Index returned 8.2%

for the same period.

98

100

102

104

106

108

110

112

114

116

-4%

-2%

0%

2%

4%

6%

8%

Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15

Com

pou

nd g

row

th o

f R10

0

Mon

thly

disp

ersio

n of

ma

nage

r ret

urns

Monthly manager return Average fixed income return ALBI

Performance dispersion

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 25

MULTI-STRATEGY

Average net equity exposure

Managers with net equity exposure in multi-strategy funds maintained an average equity exposure

of between 0% and 10%, representing 25.2% of strategy assets. 40.2% of the strategy assets had a

net equity exposure of 10% to 50%, a 12.7% decrease from the year before. There was an increase

of 23.8% in strategy assets with a net equity exposure of between 150% and 200%.

Gross exposure in multi-strategy funds remained high with 38.4% of assets in the strategy having

exposures of 100% to 150%, and 21.7% with exposures of between 150% and 200%. There was an

increase from 19.5% to 38.1% in gross exposure of 200% to 300%.

Average gross 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 Jun'15

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 Jun'15

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NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 26

Trading activity

In June 2014 the multi-strategy returned 18.0%, in the period under review the strategy returned

8.9%.

0%

10%

20%

30%

40%

50%

60%

70%

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 Jun'15

In 2014, 5.1% of the strategy traded more than six times NAV, compared with 42.6% this year.

Trading of between two and four times NAV decreased from 58.5% to 16.4%, indicating a more

aggressive trading trend over the period in this strategy.

98

100

102

104

106

108

110

112

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15

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 multi-strategy return

Performance dispersion

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13.8% 13.7%

11.3%10.1%

11.9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

0%

10%

20%

30%

40%

50%

60%

70%

> R1 Billion R500 Million to R1Billion

R200 Million to R500Million

R100 Million to R200Million

< R100 Million

% R

etur

n

% A

sset

s und

er m

anag

emen

t

Fund AUM

-2.7%

1.8%

-4.8%-7.5%

28.9%

20.0%22.5%

41.4%

-10%

0%

10%

20%

30%

40%

50%

Market Neutral Fixed income Multi-strategy Equity Long/Short

Min 25th Median 75th Max

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 27

PERFORMANCE

The maximum return in the equity long/short strategy was 41.4% and minimum return -7.5%.

Multi-strategy had a maximum return of 28.9% and equity market neutral 20%. The average Sharpe

ratio for the strategies was 2.17 for equity long/short 1.63 for fixed income, 1.52 for equity market

neutral, and 1.19 for multi-strategy.

Strategy performance dispersion

The measure of performance of each hedge fund, depending on the assets in the fund, illustrates

stronger performance for funds with more than R1 billion in assets. The survey indicated that the

Fund size versus average performance

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INDUSTRY PROSPECTS

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 28

RETAIL OR QUALIFIED INVESTOR HEDGE FUNDS

In light of new regulations, participants were asked if they would register their respective funds as retail investor hedge funds of qualified investor hedge funds:

• 36.0% of participating funds (representing 35.5% of assets) will register their funds as retail investor hedge funds • A further 37.8% of participants (representing 27.0% of industry assets) will be QIHF • The remaining managers who represent 37.5 % of the asset were still uncertain

FOCUS AREAS OF GROWTH

Hedge fund asset managers were asked to name the top three areas of focus that they will concentrate on over the next 12 months

1. Raise new sources of assets 2. Expand their team 3. Expanding distribution in different geographical areas

REGULATORY HURDLES

We asked asset managers what they thought the three biggest obstacles were that a hedge fund needed to overcome to comply with the hedge fund regulations in the next 12 months

1. Deciding on a management company (Manco) 2. Finding independent trustees/directors 3. Implementing the necessary risk management framework

PLANNING TO INVEST

We asked asset managers in what areas their company was planning to invest in over the next 12 months.

1. Marketing of funds 2. Portfolio management 3. Distribution

Hedge fund managers were polled on their views following the recent changes to hedge fund regulations specifically dealing with their views on foreseeable regulatory impact on their business. Below are the findings.

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CONCLUSION

NOVARE INVESTMENTS . SOUTH AFRICAN HEDGE FUND SURVEY 2015 . 29

SOURCE OF INFLOWS

We asked asset managers where they expect the movement in the sources of fund inflows in the next 12 months to be from:

The South African hedge fund industry has continued to mature, showing resilience in pursuit of a larger footprint in the local financial market. In the period under review the industry grew assets mainly as a result of solid fund performance.

New regulations open a new path for fund managers to navigate and we look forward to reporting next year on how the industry adjusts to the changed landscape. Novare Investments would like to extend our sincere gratitude to all of the hedge fund managers who participated in the survey, making this 12th edition possible.

Institutional

FOFs

High net worth individuals

74.8%

58.6%

79.3%

25.2%

36.9%

18.0%

Increase Stay the same Decrease

0%

3.6%

2.7%

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1

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www.novare.comwww.novareinvestments.com

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D I S C L A I M E RThis survey report is for the use of Novare Investments (Pty) Ltd (“Novare Investments”) and its clients only

and is subject to copyright. Copyright in this document created by Novare Investments will remain

vested in Novare Investments. It may not be reproduced in total or in part nor published externally

without prior written consent of Novare Investments.

The information in this survey report does not constitute the personal views of Novare Investments and

opinions expressed herein are subject to change without notice. The 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 Investments makes no representations as to

the accuracy or completeness of this information and accepts no liability in relation to this issue. Novare

Investments will not accept any liability for losses suffered as a result of inaccuracies or incomplete

information. Novare Investments, its directors, employees and agents shall not accept any liability or

responsibility of whatsoever nature and however arising in respect of any claim, damage, loss or

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This document is for information purposes only and is not intended for the solicitation of new business nor

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Past performance is not indicative of future returns which may increase as well as decrease over time.

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