Page 157 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Classification of CISs

Regional portfolios give investors at least 80% exposure to assets in a specific country or
region (such as USA or Europe).
The third tier of classification is based on investment strategy:
Long Short Equity Hedge Funds predominantly generate returns from positions in the
equity market regardless of the specific strategy employed.
Fixed Income Hedge Funds are portfolios that invest in instruments and derivatives that
are sensitive to movements in the interest rate market.
Multi-Strategy Hedge Funds are portfolios that do not rely on a single asset class to
generate investment opportunities but rather blend a variety of different strategies and
asset classes with no single asset class dominating over time.
Other Hedge Funds are portfolios that apply strategies that do not fit into any of the
other classification groupings.
The fourth tier of classification applies only to Long Short Hedge Fund portfolios. These
portfolios are further categorised as follows:
Long Bias Equity Hedge Funds will, over time, aim for a net equity exposure in excess of
25%.
Market Neutral Hedge Funds are expected to have very little direct exposure to the
equity market. On average, over time, net equity exposure should be less than 25% but
greater than -25%.
Other Equity Hedge Funds is for portfolios that follow a very specific strategy within the
equity market such as listed property or a sector specific strategy.
ASISA will consider adding new categories when there are five or more hedge fund portfolios in
either the Qualified Investor Hedge Fund or Retail Investor Hedge Fund categories with an
identical or substantially similar objective and investment policy.
Other categories that could arise in SA in the future include volatility arbitrage, commodities,
structured finance and event-driven strategies (all of which are found overseas). An event-driven
strategy looks to exploit corporate actions like mergers, acquisitions and unbundlings.
Discretionary macro funds take bets on the direction of currencies, major market indices,
commodities and interest rates.
Other Types of Funds
Two fund types no longer have separate categories in the unit trust classification system –
funds of funds and index funds. These funds merely use different methods for achieving the same
investment mandates as their competitors.
These categories transcend the sectors of the classification system. Many management
companies have launched funds of funds in the Worldwide and Global sectors, and they also
feature in the South African Equity and Multi Asset sectors. Index funds are also found in a
number of Equity and Multi Asset sectors.
Funds of Funds (FoFs)
A fund of funds (or “FoF” for short) is a unit trust that invests in a range of other unit trusts.
When FoFs were first introduced in 1998, legislation at the time required that funds of funds could
have no more than a 20% exposure to any one unit trust fund. This meant that a FoF had to invest
in a minimum of five component unit trust funds. This requirement has subsequently changed –
since August 1999 funds of funds need only consist of two underlying unit trusts (max 75% in any
one fund).
Funds of funds are designed to suit the needs of investors with a particular risk profile, and
have been described as the “CIS managers’ response to wrap funds”. There are “aggressive
FoFs”, “balanced FoFs” and “managed flexible FoFs”.
There are two main kinds of funds of funds. “In-house” FoFs invest in only the unit trust
funds of a particular unit trust management company. One could say that they carry a
slightly higher investment risk than the FoFs that invest across a range of unit trusts from
different management companies in that they are directly exposed to the “house view” of a
particular management company.

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