South African Hedge Fund Disbursements

South African Hedge Fund Disbursements

In a significant move for the South African financial market, foreign hedge fund managers can now access the country's fund distribution market, thanks to the introduction of regulations on hedge funds. This development, which came about in 2012 following a proposed framework issued by the National Treasury and Financial Services Board, has opened up new opportunities for foreign fund managers.

Under the Collective Investment Schemes Control Act (CISCA), foreign hedge fund managers can leverage the streamlined process offered by Section 65. To qualify, they must be domiciled in a jurisdiction recognised by the Financial Sector Conduct Authority (FSCA), which includes leading fund centres such as Ireland, Luxembourg, Guernsey, Jersey, and Malta.

The fund's regulatory regime must align closely with South African requirements. Key areas include the segregation of assets, maintaining adequate liquidity for investor withdrawals, providing comprehensive and accurate disclosures to investors, and compliance with international tax transparency frameworks such as FATCA and the Common Reporting Standard.

While not explicitly required for Section 65, having a local representative can facilitate communications and compliance with South African regulations. Foreign fund managers must also prepare and submit a compliant application to the FSCA, which includes meeting these regulatory standards.

The approval process considers the regulatory environment of the fund's home jurisdiction, which should be similar to that of South Africa. Foreign fund distribution in South Africa typically mirrors the one of the home state domicile.

The South African government classified the business of hedge funds under local collective investment schemes in 2015, a decision made in response to the 2009 financial crisis, South Africa's role in the G20, and the commitment to spearhead the global economic governance reinforcement process across Africa.

Foreign fund managers applying for approval need to specify the target market in their home state. This move allows for more complex foreign funds to enter the South African fund distribution market.

The South African market for fund distribution is mature, with a concentration of players in every sector governing the relevant fund distribution channels. The ability for foreign hedge funds to be recognised in South Africa may further diversify the market and provide new investment opportunities for local and foreign investors alike.

Two main types of hedge funds have emerged from this proposal: Restricted hedge funds and Retail hedge funds. Restricted hedge funds are not offered nor solicited to the wider public and can only be participated in by qualified investors with high minimum investment amounts. Retail hedge funds, on the other hand, can have both retail and institutional investors, but are subject to more restrictive prescriptions, such as requirements for identifying assets, limits on leverage, and requirements for valuation and liquidity of strategies.

The use of derivatives in foreign funds is limited in South Africa due to a conservative environment driven by capital preservation. However, the introduction of regulations on hedge funds may relax this stance, opening up new investment strategies for local and foreign investors.

Foreign managers can access the South African market with their funds, but the specific process for doing so is not detailed in this article. It is advisable for interested parties to consult the relevant regulatory bodies for the most accurate and up-to-date information.

[1] Source: https://www.fsb.co.za/regulation/collective-investment-schemes/recognition-of-foreign-funds/ [2] Source: https://www.pwc.co.za/en/za/services/asset-management-and-investment-funds/insights/hedge-funds-in-south-africa.html [3] Source: https://www.lexisnexis.com/hottopics/lnacademic/view/document/?pdmfid=175084&format=GNBV&sortby=PDATEST&start=1&results=10&st=advanced&search=on&csi=10003&cc=10006&ccs=10006%2C10003&adv=y&search_scope=everything&q=hedge+fund+south+africa&search_field=all_fields&search_location=everywhere&search_type=everywhere&search_result_num=10&page=1&sort_by=PDATEST&search_mode=advanced&search_source=search_box&n=0

1. Given the recognition of foreign funds in South Africa, finance professionals may now consider investing in hedge funds that meet the regulatory requirements established by the Collective Investment Schemes Control Act (CISCA) and the Financial Sector Conduct Authority (FSCA).
2. To access the South African fund distribution market, foreign hedge fund managers must submit a compliant application, which includes complying with South African regulatory standards, specifying their target market, and providing adequate disclosures to investors.

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