Page 155 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Classification of CISs

Popular Hedge Fund Strategies Summarised
Long/Short Equity: Buying equities expected to rise and shorting equities
expected to fall, both to profit from contra-correlated sectors and to protect the
funds against downside risks.
Equity Market Neutral: These strategies strive for low beta while exploiting pricing
asymmetries between negatively correlated assets.
Event Driven: Taking positions around significant corporate events like unbundlings,
mergers, acquisitions, bankruptcies, rights issues and share buybacks.
Fixed Income: These are strategies that either take positions on the yield curve or arbitrage
price discrepancies in interest-bearing instruments.
Multi-Strategy: Hedge funds that switch strategies and rapidly reallocate capital depending
on market conditions and available opportunities.
Volatility Arbitrage: A strategy that exploits differences in actual and implied volatilities
across options on a range of financial instruments.
Commodity: Any strategy focussed on the commodities markets which uses the wide range
of derivatives available on physical goods like agricultural products, metals and oil.

FSB Board Notice 52 of 2015, published by the Registrar of Collective Investment Schemes on
6 March 2015, set out various requirements with which hedge had to comply before 31 March
2016 (or within 12 months of registration).
For existing funds, especially those targeting retail investors, the progression to being
registered under CISCA involves several steps: application, FSCA approval, conversion of the
existing fund (none, historically, did daily pricing), registration, and finally the formal launching of
the reconfigured fund. The first two hedge funds approved under the new regulations by the FSCA
were launched on 1 February 2016.
The new regulations allow for two types of hedge funds: restricted (or “qualified”) and retail.
Qualified funds are aimed at the well-heeled and well-informed: a qualified investor must deposit
at least R1 million into the restricted hedge fund and must have an investment track-record. Retail
funds, which are to be more closely regulated, must, amongst other rules, restrict gearing to 100%
of assets and may not invest in property or qualified investor hedge funds.

Similarities and Differences
As a separate category of collective investments, hedge funds are in some respects subject to
different rules. Investors and advisors alike need to be aware of the ways in which hedge funds
differ from other collective investments. Some of the noteworthy similarities and differences are
highlighted below.
As with other collective investment schemes, investors in retail hedge funds will only risk
the capital they invest. This may not always be the case for qualified funds, however –
qualified investors need to carefully check their contractual obligations before investing in
qualified funds.
Like other collective investment schemes, retail hedge funds will publish TERs (total
expense ratios) and portfolio details.
For tax purposes, hedge funds will be treated in the same way as equity unit trusts.
Historically, most hedge funds have not distributed income but this will change going
forward. As with other collective investment schemes, distributions will be taxable in the
hands of investors (partly as interest and partly as dividends, depending on the instruments
held by the fund).
Nearly all hedge funds charge high uncapped performance fees – usually 20% of
outperformance. This is over and above the 1% or 2% annual fee (referred to as a 1/20 or
2/20 fee structure). Very few funds have claw-back provisions (ie, repayment of
performance fees to investors in the event of performance retractions).

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Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts