NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

Transcription

1 HEDGE FUND

2 OVERVIEW 2 Highlights 2 ASSET LEVELS 3 Strategies 3 Asset flows 5 Ten largest hedge funds 6 Capacity 6 OPINION POLL: Industry growth 7 HEDGE FUND ASSET MANAGER PROFILE 7 Total assets 7 Hedge fund assets 8 FAIS compliance monitoring 9 HEDGE FUND INDUSTRY PROFILE 10 Manager head count 10 Manager experience 10 Investors 10 Investment structure 11 Investor dealing frequency 11 Redemption provisions 13 Fees 13 Portfolio transparency 16 Track record 16 EQUITY LONG/SHORT 17 EQUITY MARKET NEUTRAL 19 FIXED INCOME HEDGE 21 MULTI-STRATEGY 24 HEDGE FUND OPERATIONAL ASPECTS 26 Fund audit 26 Client administration 26 Fund valuation 27 Risk monitoring 27 Prime broker 28 CLOSING REMARKS 28 CONTACT US 29 Disclaimer 29 NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

3 OVERVIEW This report marks the tenth edition of the Novare Investments South African Hedge Fund Survey. The main purpose of the survey is to cover pertinent aspects relevant to the South African hedge fund industry by taking a snapshot as at 30 June 2013, and to comment on key industry trends and developments tracked over the past decade. South Africa s leading hedge fund managers contribute to this independent survey, which covers data from 55 South African domiciled asset management companies. Participation is voluntary and open to any asset manager offering hedge funds that invest predominantly in the South African market. This survey includes 107 different mandated single strategy hedge funds. The survey would not be possible without the participation of South African hedge fund managers and Novare Investments would like to extend its sincere gratitude for their continued support. HIGHLIGHTS The local hedge fund industry has surpassed the R40 billion assets mark, reaching a new all-time high. 13 new funds were launched during the 12 months to end June, while 15 funds returned investor capital. Equity long/short funds continued to dominate the local hedge fund industry with more than half of industry assets managed within this strategy. The ten largest hedge funds as at 30 June 2013 managed 42.9% of total industry assets. There is a rising trend amongst managers offering investors the option of investing in a share class charging a lower (or even zero) management fee, in combination with a higher performance fee. Hedge funds with a track record exceeding eight years manage more than 50. of industry assets. The equity long/short strategy was the best performing category over the period. Compared to exposure levels from a year prior, these funds on average also had higher gross and net equity market exposure levels over the past 12 months. Close to half of the industry make use of an external or independent risk monitoring service provider. There is a rising trend within the industry towards using a second (or multiple) prime broker. All data is expressed as a percentage of total industry or strategy assets under management, unless otherwise indicated. NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

4 ASSET LEVELS Despite slow growth in hedge fund assets over the last five years, inflows combined with performance during the 12 months to 30 June 2013 increased total industry assets to in excess of R40 billion. Indeed, as at 30 June 2013, the 55 participating asset managers in this year s survey collectively managed assets exceeding R42.2 billion in local domiciled hedge funds. This is the highest level reached since the first hedge fund survey, yet it remains a small fraction of the size of both local collective investment schemes with R1.33 trillion* as well as the global hedge fund industry, with the latter having reached R23.78 trillion** by the second quarter of Industry assets R45,000 R 42,204 R40,000 R35,000 R30,000 R 30,274 R 29,434 R 32,096 R 31,433 R 33,595 R 25,895 R million R25,000 R20,000 R15,000 R 15,361 R10,000 R5,000 R0 R 6,068 R 3,286 R 1,388 R 2,125 Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08 Jun'09 Jun'10 Over the past year, 13 new funds were launched locally, of which seven were from established asset managers that already offer hedge fund products. As at 30 June 2013 the newly launched funds housed total assets of R777 million. Funds of funds continued to support new launches, allocating 60. of the assets in these funds, followed by high net worth individuals with 20. of assets. STRATEGIES For the purposes of this survey, participants were asked to classify their hedge funds according to the most popular strategies utilised within the South African market. Equity long/short continued to dominate the South African hedge fund industry with 52.5% of total assets - a significant increase from 44.9% in This increase is attributable to both material new capital inflows as well as performance growth. Of the 13 new funds launched during the year, seven were equity long/short funds. *Media Release Association for Savings and Investment South Africa (ASISA), 12 Augustus 2013 **USD 2.41 trillion with an exchange rate of USDZAR 9.86, New HFR Report: Hedge Funds Extend Record Asset Levels, 18 July 2013 NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

5 The second largest strategy is fixed income hedge housing 15.7% of total industry assets, compared to 18.5% a year prior. Multi-strategy is now the third largest strategy at 9. of total industry assets, compared to 10.2% last year. Equity market neutral continued to lose market share and accounted for only 7.4% of total industry assets, compared to 14.6% in Volatility arbitrage still accounted for just under 4. of industry assets. Structured finance funds accounted for 2.8% of industry assets compared to 1.3% in Hedge funds that invest almost exclusively in commodities doubled in size from 1.3% last year to 2.6% of industry assets as at 30 June This can mainly be attributed to new capital inflows into existing funds. Other strategies included trend following (0.5%), macro (0.3%), and statistical arbitrage (0.1%). Assets by strategy Jun'04 Jun'05 Jun'06 Jun'07 Jun'08 Jun'09 Jun'10 Equity long/short Equity market neutral Fixed income hedge Multi-strategy Volatility arbitrage Structured finance Commodities Other strategies Equity long/short: Funds aim to generate positive returns by being simultaneously long and short in the equity market. Market risk is reduced while company-specific risk is retained. The majority of local equity long/short funds tend to be long biased. Equity market neutral: Funds take similar sized long and short positions in related equity sectors with the effect that directional market risk is offset. Macro: Funds opportunistically allocate capital among a variety of strategies and asset classes, often following a top-down thematic approach, moving between countries, markets and asset classes. Statistical arbitrage: Quantitative models are used to identify market opportunities and establish short-term positions involving a large number of securities. NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

6 Trend following: Technical analysis rules are used to recognise trends in different markets. Managers normally aim to spot trends or momentum direction early on in order to capitalise on behavioural over- or under-reaction by other market players. Volatility arbitrage: Funds aim to exploit mispricing between similar instruments where the mispricing is the result of different volatility assumptions by price makers. Multi-strategy: An investment philosophy allocating investment capital to a variety of investment strategies and potentially across several asset classes. Commodities: Funds that predominantly invest in soft or hard commodities. These funds can follow a number of different strategies to obtain alpha from this asset class, including trend following or non-directional market neutral strategies. ASSET FLOWS Just over R5 billion of new capital was invested into South African hedge funds over the year to end June. Investors allocated as follows: Equity long/short funds received the highest inflows of just over R4 billion. Fixed income hedge funds received nearly R600 million over the year. Equity market neutral funds suffered net outflows of approximately R350 million. All other strategies were also net receivers of capital, with commodities hedge funds receiving R226 million, structured finance R102 million and multi-strategy R53 million. Funds that returned investor capital over the year, managed around R1.3 billion at the start of the reporting period. In total, 15 hedge funds were dissolved during the course of the 12 months, with more than 80. of these following equity market neutral strategies. Asset flow by strategy R 6,000 R 5,000 R 4,000 R 3,000 R million R 2,000 R 1,000 R 0 -R 1,000 -R 2,000 -R 3,000 Equity long/short Equity market neutral Fixed income hedge Multi-strategy Commodities Structured finance Other Inflows Outflows Dissolved funds NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

7 TEN LARGEST HEDGE FUNDS As at 30 June 2013 the 10 largest hedge funds housed a total of R17.3 billion (42.9% of industry assets). This equates to growth in excess of 279.3% (annualised 30.5%) since June 2008 when the same funds housed total assets of a mere R4.7 billion. The 10 largest funds at June 2008 managed total assets of R9.2 billion or 30.6% of industry assets at that time; five of these are still in the top ten list in Of these funds one fund has returned investor capital during the past five years. As at 30 June 2013, seven of the 10 largest hedge funds were equity long/short funds. Compared to funds outside of the top 10, the top 10 funds also received the bulk of new capital inflows over the year, with more than half of all new industry capital being allocated to the largest 10 funds. Ten largest hedge funds 45,000 40,000 R 42, ,000 30,000 R 30,274 R 29,434 R 32,096 R 31,433 R 33, R million 25,000 20, , ,000 5, % 30.1% 36.3% 36.9% 40.6% 42.9% Jun'08 Jun'09 Jun'10 Industry total AUM Ten largest funds as percentage of industry AUM All of the funds in the top 10 list have track records exceeding four years; however eight of the top 10 funds boast a track record of more than seven years. Of the top 10 funds, eight are managed by boutique hedge fund asset managers with the other two managed within diversified asset management companies each managing assets exceeding R100 billion across their different investment products. CAPACITY Funds that housed 82.1% of industry assets as at 30 June 2013 were still open for new investments. In addition, funds managing 11.4% of industry assets were soft closed (funds only taking additional investments from current investors) with funds representing 6.5% of industry assets being hard-closed (funds not accepting any new flows from new or existing investors). Participants with funds still open for investments indicated that they had an additional R72 billion of capacity available in their current funds, with just over half of this available in the equity long/short strategy. NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

8 OPINION POLL: Industry growth Participants were asked where they expect growth for the industry to originate from, with the following responses: 41.1% expect regulatory change to lead to industry growth. A further 29.9% were of the opinion that expanding distribution channels could increase assets. 10.3% indicated that customised solutions for each client could attract additional capital. Other options included increasing capacity in current offerings (6.5%), launching new hedge fund strategies (6.5%), managing long-only capital (2.8%), and growth through a strategic partnership or acquisition (2.8%). Expected industry growth Regulatory reform 41.1% Expand distribution channels 29.9% Customised solutions for clients 10.3% Launch new strategies 6.5% Increase capacity in current offerings 6.5% Expand into long only space 2.8% Strategic partnership or aqcuisitions 2.8% HEDGE FUND ASSET MANAGER PROFILE TOTAL ASSETS For many managers, hedge fund products are not their sole source of income and many long-only asset managers also have hedge fund products as part of their investment offering. A total of 21.8% of South African hedge fund assets were managed within larger asset management companies each managing total assets in excess of R100 billion (or where the fund manager is a subsidiary of a larger asset manager). A further 21.7% of participants also managed other (typically long-only) mandates with total assets under management across all products totalling between R10 billion and R100 billion each. Similarly, 9.3% of industry assets were managed within companies managing between R5 billion and R10 billion across all their investment products. A further 24.1% of industry assets were managed within companies managing other investment products of between R2 billion and R5 billion each. Only 9.4% of industry assets were managed within companies managing less than R500 million in total across all their investment products. NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

9 Hedge fund AUM split - by asset manager s total AUM Less than R500 million 9.4% Between R500 million and R1 billion 6.5% Between R1 and R2 billion 8.2% Between R2 and R5 billion 23. Between R5 and R10 billion 9.3% Between R10 and R100 billion 21.7% More than R100 billion 21.8% HEDGE FUND ASSETS Since the financial crisis in 2008 there has been consolidation at a steady pace in the South African hedge fund industry, with the concentration of hedge fund assets managed by the larger managers increasing. This year again it was recorded that several hedge fund managers joined larger, established hedge fund managers, even though they still managed the same mandates. Proof of this consolidation is evident from the concentration of assets in companies managing hedge fund assets in excess of R2 billion across their hedge fund products. These companies in aggregate managed more than 68.2% of industry assets, compared to 46.7% a year ago. Companies with more than R2 billion in hedge fund assets also received 61.4% of new capital inflows during the year, continuing the trend that the larger companies tend to grow even larger. Other meaningful changes in the concentration of assets included asset managers with hedge fund assets of between R1 billion and R2 billion dropping from 32.1% to 13.3%, with asset managers managing less than R100 million down from 3.1% to 1.5%. Industry concentration by total hedge fund assets per asset manager % % % 33.7% % 10.7% 8.9% 7.3% 8.4% 2.5% 3.1% 2.9% 3.2% % 1.4% < R100m [R100m;R200m) [R200m;R500m) [R500m;R1bn) [R1b;R2bn) >R2bn NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

10 FAIS COMPLIANCE MONITORING The South African asset management industry has for some time had substantive regulations in place governing the conduct of financial services providers. Hedge fund managers have been regulated since October 2007 under the Financial Advisory and Intermediary Services Act 37 of 2002 (or FAIS, as it is more commonly known) under a special license category called Category IIA. Further progress on the regulatory front has been the explicit inclusion of hedge funds as a separate category in existing legislation governing prudential investment limits for local pension funds, as promulgated by the amended Regulation 28 of July The Financial Services Board (FSB) and National Treasury are currently in the process of bringing hedge fund products into the regulatory fold, with the proposal to regulate these funds as collective investment schemes under the Collective Investment Schemes Control Act, 2002 (CISCA). FAIS CAT II license: an authorised financial services provider (FSP) that renders intermediary services of a discretionary nature as regards the choice of a particular financial product. FAIS CAT IIA license: an authorised hedge fund FSP that renders intermediary services of a discretionary nature in relation to a particular hedge fund or fund of hedge funds in connection with a particular financial product. FAIS compliance monitoring by percentage of funds % % % % % % % 0. Outsourced In-house and outsourced In-house Increased regulation has required changes in how the asset management industry in South Africa operates, with an increased focus on compliance monitoring and implementation of processes to facilitate regulatory reporting. Even though this leads to rising costs for investors, increased oversight should strengthen investor protection mechanisms and ultimately lead to greater confidence in the industry. All asset managers that participated in this survey were either registered with the FSB as CATIIA Hedge Fund FSPs, or were appointed as a juristic representative under another company s license. Of the participants, a total of 16.3% were juristic representatives under another entity s license. NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

11 All of the participants were registered with the FSB for both license categories CATII and CATIIA. An increasing number of asset managers opted to outsource the function of compliance monitoring to a dedicated independent third party. Asset managers outsourcing this function represented industry assets of 64.5%, compared with 46.2% last year. It is worth noting, however, that managers with an internal compliance monitoring function were typically the larger ones with assets in excess of R100 billion across all investment products - implying that this is mainly a consideration of economies of scale. HEDGE FUND INDUSTRY PROFILE MANAGER HEAD COUNT Volatility arbitrage funds employed the most investment professionals in the South African industry with an average of 4.3 people per fund. This was followed by multi-strategy funds with an average of 3.4 professionals responsible for each fund. All of the other strategies employed between two and three investment professionals. Participants managing 7.6% of industry assets had only one investment professional responsible for the fund management function. To support the investment team, on average each hedge fund had an average of 3.2 analysts dedicated to the research process. MANAGER EXPERIENCE A noteworthy observation was that investment professionals managing fixed income hedge funds had the longest experience in investment management, with an average 15.5 years of investment experience for each professional. This was followed by hedge funds specialising in commodities, with an average of 14 years investment experience for each investment professional. The average number of years investment experience on the part of professionals for all other South African hedge fund strategies ranged between 10 and 13 years. INVESTORS Funds of hedge funds continued to be the largest allocator of capital, accounting for 63. of industry assets as at 30 June Other investors into South African hedge funds were: High net worth individuals represented 16. (up from 12.4% the previous year). Life funds represented 6.4% of industry assets. Seeding and proprietary capital accounted for 6. of assets. Direct pension fund investments represented 5. of industry assets. Retail investors represented 2.5% of industry assets. Short term insurers represented 1.1%. NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

12 Industry assets % 66.3% Funds of funds 7.6% 12.4% High net worth individuals 10.3% 6.6% 6.4% 6.3% 5.4% % 5.8% % 3.4% 2.5% 1.1% 0.1% 1.1% Life funds Seeding/Proprietary Pension funds Retail Short term insurers Funds of hedge funds seemed to have made some large strategic allocation changes over the year. This investor group represented 44. of assets in the equity long/short strategy, up from 36.4% last year, whereas their allocation to equity market neutral halved from 18.6% to 9.9%. However, funds of hedge funds allocation to multi-strategy and fixed income strategies remained relatively unchanged. INVESTMENT STRUCTURE En commandite partnerships grew in popularity, mainly on the back of capital inflows and strong performance, specifically from equity long/short funds structured as en commandite partnerships. Over 60. of industry assets were housed in these partnerships. The debenture/trust structure became less prominent, with a fall in assets in these vehicles from 37.2% to 30.5%. This change was mainly a result of the relative underperformance of strategies housed in debentures. The remainder of hedge fund assets were structured as notes (5.1%), on platforms (1.3%) and trusts. Investment structure % 60.3% % % 37.2% % % % 2.1% 2.3% 2.1% % 2.2% 2.9% 1.3% 0.1% en commandite partnership Debenture structure Trust Note Platform Other Of new funds that were launched during the twelve months, 10 were structured as en commandite partnerships with only one adopting a debenture structure. NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

13 INVESTOR DEALING FREQUENCY Investor subscription and redemption dealing frequency remained relatively unchanged from last year with funds representing 99.2% of industry assets allowing monthly investor dealing. Funds representing 0.5% (down from 1.5%) allowed daily dealing while 0.2% had quarterly dealing. Funds representing more than three quarters of the industry required a month s notice for redemptions (76.7% of assets, up from 72.5% in 2012). This was also the minimum required redemption notice period. A further 2.9% of funds required 60 days notice for redemptions and funds representing 17.5% of assets required 90 days notice, down from 23.1% the previous year. As a larger number of structured finance funds participated in this survey, with these funds typically requiring a longer redemption notice period, the number of funds requiring a redemption notice period of longer than 90 days has more than doubled from last year. However, these funds only represented 2.9% of industry assets. Redemption notice period % 72.5% 76.7% % 23.1% % % 3.9% 2.7% 2.9% % 0.6% 0.1% 1. < 30 days 30 Days 60 Days 90 Days Longer than 90 days A noteworthy observation is that more managers (according to assets under management) imposed a lock-up period for investors. These tended to be either structured finance funds or fixed income hedge funds. Lock-up periods typically apply to an investor s initial investment and can range from three months to three years. Funds managing 3.9% of industry assets applied a lock up period of three months. This increase from 0.6% is attributable to new funds entering the survey. Funds representing 0.6% of assets applied a six-month lock up period. For 1. of industry assets, a one-year lock up period applied. For 2.3% of assets (up from 0.3% last year) a three-year lock up period applied. This was mainly in the structured finance strategy. However, the vast majority of funds, representing 92.3% of industry assets, still had no lock-up period. NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

14 Initial investment lock-up % 98.2% 92.3% % 3.9% 0.6% 1.2% % 0.1% % 0.3% None 3 months 6 months 1 year 3 years 2.3% REDEMPTION PROVISIONS Funds representing 32.2% of industry assets were allowed to ring-fence assets in the event of an outflow, while funds representing a further 27.7% had gating provisions in place. This meant that these funds could restrict the maximum rand amount or percentage amount of an investor s total redemption paid out in a particular month, and stagger pay-outs over several months in order to minimise the impact of liquidating fund holdings in a short period of time. Funds representing 29.1% of industry assets had suspension provisions in their respective prospectus documents, with funds managing 8.8% of industry assets allowing side pocketing in the event of withdrawals. Redemption penalties were applied by funds managing 8. of industry assets. FEES Overall, investors in South African hedge funds paid lower management fees compared to a year ago. This was the result of additional managers offering a share class where a lower or zero management fee is charged in combination with a higher performance fee. Funds representing 6.4% of industry assets offered such a share class - an increase from 5.2% last year. Furthermore, funds representing 3.1% of assets reduced their basic fee to below 1. a year. However, the majority of managers still charged a 1. management fee, although there was a reduction in the assets represented by these managers (from 69.4% to 65.1%). Managers charging more than 1. were unchanged from previous years. Funds representing 16. and 9.4% of industry assets charged respective annual management fees of 1.5% and 2.. Of the new funds launched, 70. charged a management fee of 1.. On average, South African hedge funds charged a basic management fee of 1.1%. NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

15 Management fee % 15.5% 9.8% 9.4% 15.5% % 69.4% 65.1% % 4.6% 5.2% 6.4% p.a. (performance fee only) 0.5-1% p.a. 1% p.a. 1.5% p.a. 2% p.a. Even though an increased number of funds now charge a performance fee of more than 20., these funds either have a lower, or in some cases zero, management fee or a higher hurdle rate to surpass before a performance fee can be taken. There was also a notable increase in the number of funds that charge performance fees of 17.5%, whereas the number of funds charging a performance fee of 10. has reduced further and these funds now represent a mere 0.1% of industry assets. Performance fee rate % 91.9% 81.5% % 2.3% 3.6% 4.6% % 0.1% 1.2% 2.5% % % South African hedge funds generally preferred using the local cash rate (as measured by the STeFI Composite rate in most instances) as the hurdle rate to outperform before a performance fee was taken. Funds representing 76.1% of industry assets fell into this category. Fewer funds than in the previous year used cash plus a fixed margin as their hurdle rate. However, the number of participants that did not use a hurdle rate in the calculation of performance fees decreased from 14.9% to 9.6% of industry assets. NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

16 The second most commonly used hurdle rate in the calculation of performance fees was inflation plus a fixed margin. The increase in the assets represented by this fee class was attributable to significant performance growth by these funds. Performance fee hurdle % 73.6% 72.2% % 14.9% 9.6% 7.8% 5.2% 5.9% 3.3% 2.4% 2.3% % 2.8% % On all performance 1 Cash Cash + fixed hurdle Inflation Inflation + fixed hurdle Other The number of funds charging a performance fee only on the portion of outperformance of the hurdle is in line with last year. There was a slight increase in the number of funds using the accelerated performance fee method, alternatively called the trigger hurdle method where the performance fee is taken from zero, but only as long as the investor receives a net performance at least equal to the hurdle. Performance fee calculation methodology % 14.7% 9.6% % 47.7% 53.5% % 37.7% 36.9% 1 From the hurdle rate itself From zero but client receives at least the hurdle rate On all performance Funds for which performance fees crystallise quarterly grew in size over the year. As a result, a slightly larger percentage of industry assets were represented by funds with this performance fee payment arrangement. NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

17 Crystallisation of performance fees % 44.7% 41.6% % 15.1% 12.7% % 38.4% % 1.8% 1.7% Monthly Quarterly 6-monthly Annually Longer than 1 year PORTFOLIO TRANSPARENCY Transparency in terms of disclosing portfolio holdings to investors remained the norm in the South African hedge fund industry. Many investors can obtain this level of information on a daily basis, as indicated by funds managing 58.7% of industry assets. Worth mentioning, nearly 80. of funds within the equity disciplines offered daily transparency. Portfolio Transparency % 58.7% 53.4% % % 28.5% % 7.1% 5.9% 0.8% 1.6% 1.3% 1.3% 1.7% 1.8% 2.4% 0.1% 0.3% Actual daily Actual weekly Actual monthly Actual quarterly Actual annually Occasionally, with a lag TRACK RECORD Hedge funds with a track record exceeding 10 years represented 21.2% of industry assets, while those with a track record exceeding eight years but less than 10 years managed 27.5% of assets. NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

18 Track record % of funds 10.4% % 11.2% 10.4% 10.4% % AUM 1.7% 16.6% 18.8% 14.2% 27.5% 21.2% < 1 year 1-3 years 3-5 years 5-8 years 8-10 years > 10 years In the next four sections strategy-specific details are covered relating to performance, exposure levels, liquidity and trading activity. Figures in this section are expressed as a percentage of strategy assets. EQUITY LONG / SHORT PERFORMANCE Strong performance from the local equity market over the 12 months supported returns for South African equity long/short funds, with the majority maintaining a long-biased exposure to the equity market. The average asset weighted return for the strategy over the year was 28.7% (the equally weighted return was a more modest 21.) compared to local equities, as measured by the FTSE/JSE All Share Index, delivering 21. over the period. These performance numbers are after all management and performance fees. Compound average return and monthly fund performance dispersion Monthly dispersion of manager returns 15% 1 5% -5% -1-15% Compound growth of R Jun'12 Jul'12 Aug'12 Sep'12 Oct'12 Nov'12 Dec'12 Jan'13 Feb'13 Mar'13 Apr'13 May'13 Jun'13 Manager monthly return (left axis) Compound average return since 30 Jun'12 (right axis) NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

19 EXPOSURE LEVELS South African equity long/short hedge funds increased their net exposure levels over the year, with the average net equity exposure ranging between 50. and Funds representing 74.1% of strategy assets were within this range. Funds representing a mere 0.1% of strategy assets had negative net equity exposure during the year. Net equity exposure: long exposure plus short (or negative) exposure divided by the fund s NAV. Gross exposure: long exposure plus absolute short exposure divided by the fund s NAV. Average net equity and gross exposure (bubble size represents strategy AUM relative to industry) Average gross exposure Average net equity exposure Jun'09 Jun'10 Similarly, the average gross exposure of equity long/short funds increased, with the majority of participants employing average gross exposure of between 150. and 200. of fund capital. Although there was an increase in the funds that maintained gross exposure of between 200. and 300., these funds represented only 10.6% of strategy assets (up from 0.9% in 2012). TRADING ACTIVITY Most equity long/short hedge fund managers indicated that their funds had turned over capital of between 0 to 2X fund NAV over the previous 12 months. Trading activity % % 51.2% 49.4% % 13.4% 20.8% 15.7% 1 5.7% 2.5% 1.9% 0.5% 1.6% 2.7% 2.2% 2.1% 0.1% X fund NAV 2X - 4X fund NAV 4X - 6X fund NAV 6X - 8X fund NAV 8X - 10X fund NAV > 10x fund NAV NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

20 LIQUIDITY PROFILE OF UNDERLYING ASSETS More than half of the participants in the equity long/short strategy estimated that their portfolio assets could be liquidated within one day. These funds represented 54.6% of strategy assets compared to 46.9% last year. Thereafter, an additional 30.1% of assets should be easily liquidated within five days, 3.2% within 10 days and 7.6% within 30 days. Thus it was estimated that funds representing 95.5% of strategy assets could be liquidated within 30 days. Portfolio liquidity profile % 54.6% % % 30.1% 28.8% % 1 7.8% 7.6% 3.4% 4.4% 3.2% 3.6% 1.7% 1.6% 1.5% 2.1% 0.8% % 0.8% 1 day 2-5 days 6-10 days days days days > 90 days EQUITY MARKET NEUTRAL PERFORMANCE This strategy suffered outflows during the last few years and several funds within this discipline returned investor capital. This resulted in the strategy losing market share and it represented only 7.4% of total industry assets. The loss of capital can mainly be attributed to relative underperformance. Despite this, the strategy delivered strong results during the first six months of The strategy delivered an asset weighted return of 5.8% and an average return of 9.7% over the 12-month reporting period. Compound average return and monthly fund performance dispersion Monthly dispersion of manager returns 1 8% 6% 4% 2% -2% -4% -6% -8% Compound growth of R100-12% 98 Jun'12 Jul'12 Aug'12 Sep'12 Oct'12 Nov'12 Dec'12 Jan'13 Feb'13 Mar'13 Apr'13 May'13 Jun'13 Manager monthly return (left axis) Compound average return since 30 Jun'12 (right axis) NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

21 EXPOSURE LEVELS Most funds within the equity market neutral strategy indicated a net exposure to the equity market of between 0. and 10. (funds representing 66.1% of strategy assets, up from 51.4% a year prior). No fund in this category had a negative net exposure to the market over the year. Just over a third of equity market neutral funds had average net exposure to the equity market of between 10. and 50. (down from 41.3% in 2012). Funds representing 0.3% of the strategy had net exposure of more than 50. (but less than 100.). Average net equity and gross exposure (bubble size represents strategy AUM relative to industry) Average gross exposure Average net equity exposure Jun'09 Jun'10 Most funds in the equity market neutral strategy had a gross exposure of between 100. and 150. during the 12 months to 30 June 2013 (funds representing 72.6% of strategy assets, a significant increase from 34.8%). TRADING ACTIVITY Equity market neutral funds recorded far higher levels of portfolio turnover than the equity long/short funds, with funds representing 38.4% of strategy assets indicating portfolio turnover of more than 10x fund capital over the year. Trading activity 5 45% % 45.8% 38.4% 35% 3 25% 25.4% % 1 5% 18.3% 15.8% 15.6% 16.2% 12.8% 12.1% % 9.4% 5.2% X fund NAV 2X - 4X fund NAV 4X - 6X fund NAV 6X - 8X fund NAV 8X - 10X fund NAV > 10x fund NAV NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

22 LIQUIDITY PROFILE OF UNDERLYING ASSETS In line with the results of equity long/short funds, the equity market neutral funds participating in the survey also estimated that the bulk of their portfolios could be liquidated within one day. It is estimated that at least 95.5% of assets in this strategy could be liquidated within 30 days. Portfolio liquidity profile % 54.6% % % 30.1% 28.8% % 1 7.8% 7.6% 3.4% 4.4% 3.2% 3.6% 1.7% 1.6% 1.5% 2.1% 0.8% % 0.8% 1 day 2-5 days 6-10 days days days days > 90 days FIXED INCOME HEDGE PERFORMANCE The 12 months under review (especially the recent few months) turned out to be an exceptionally volatile period for fixed income hedge funds. This resulted in wide ranging individual fund performances, with the strategy as a whole delivering an average asset weighted return of 4.6% over the 12 months, and an average return of 4.7%. Compound average return and monthly fund performance dispersion Monthly dispersion of manager returns 5% -5% -1-15% Compound growth of R100-25% 101 Jun'12 Jul'12 Aug'12 Sep'12 Oct'12 Nov'12 Dec'12 Jan'13 Feb'13 Mar'13 Apr'13 May'13 Jun'13 Manager monthly return (left axis) Compound average return since 30 Jun'12 (right axis) NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

23 RISK MEASUREMENT Exposures in the fixed income hedge fund space are rarely measured in terms of gross exposure, one of the prevalent indicators of risk exposure used in equity based disciplines. Instead, exposures are expressed in terms of Rand per basis point, value at risk (VaR), bucketed Rand per basis point and interest rate buckets. The most popular risk measure amongst South African fixed income hedge fund managers is Rand per basis point, with close to 50. of funds within this strategy using this as their preferred risk measurement. More than 40. of strategy assets used the VaR measure and other measures such as bucketed Rand per basis point and interest rate buckets being used in conjunction with the above measures. Rand per basis point: how much the Rand value of the portfolio will be impacted for each basis point move in the reference bond yield. Value at Risk: an indication of the potential loss a portfolio can suffer over a defined period at a predetermined probability level. Bucketed Rand per basis point: how much the Rand value of the portfolio will be impacted for each basis point move in the reference bond yield, broken down between the different maturities on the local bond yield curve. Interest rate buckets: assess a portfolio s sensitivity across different interest rate maturities on the yield curve. INVESTMENT INSTRUMENTS The most popular instruments used in fixed income hedge funds were interest rate swaps and government bonds, followed closely by forward rate agreements (FRA s). Only 39.3% of fixed income hedge funds had exposure to corporate bonds and 23.5% invested in credit linked notes. Exposure to fixed income instruments FRA's NCD's Floating Rate Notes Credit Linked Notes Equity Default Notes Swaps Government bonds Corporate bonds OTC options Caps, floors and swaptions NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

24 TRADING ACTIVITY Funds in this strategy indicated significant divergence between trading activity within portfolios, which is indicative of how different the fixed income hedge funds sub-strategies were. The most portfolios within the strategy traded their portfolios 0 to 2X fund NAV (56.6% of strategy assets), followed by more than 10X times NAV with 30.5% of strategy assets. Trading activity % 62.1% 57.7% % 24.1% 21.5% 13.3% 10.5% 6.3% 4.1% % 1.9% 1.4% 2.5% % X fund NAV 2X - 4X fund NAV 4X - 6X fund NAV 6X - 8X fund NAV 8X - 10X fund NAV > 10x fund NAV LIQUIDITY PROFILE OF UNDERLYING ASSETS Of participating fixed income hedge fund managers, funds representing 38.5% of strategy assets indicated that their portfolios could be liquidated within one day, compared to 27.4% last year. A further 19.5% of strategy assets could be liquidated within five days (27.3% in 2012), 12. in 10 days (12.9% in 2012) and 14. within 30 days. This translated into 84. of strategy assets that could be liquidated within 30 days (assuming normal market conditions). However, a larger number of funds compared to last year indicated that it would take more than 90 days to liquidate their full portfolios. Portfolio liquidity profile % % % 27.3% 24.3% 19.5% 15.1% % 12.9% % 9.8% 6.5% 5.8% 4.4% 2.2% % 0.4% 0.5% 1 day 2-5 days 6-10 days days days days > 90 days NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

25 MULTI-STRATEGY PERFORMANCE These funds achieved an asset weighted return of 7.7% (and an average return of 8.3%) over the 12 months. Compound average return and monthly fund performance dispersion Monthly dispersion of manager returns 2 15% 1 5% -5% Compound growth of R100-15% 99 Jun'12 Jul'12 Aug'12 Sep'12 Oct'12 Nov'12 Dec'12 Jan'13 Feb'13 Mar'13 Apr'13 May'13 Jun'13 Manager monthly return (left axis) Compound average return since 30 Jun'12 (right axis) EXPOSURE LEVELS On average, multi-strategy managers maintained exposure to the equity market of 40.9% of fund NAV, slightly higher than the 38.9% reported 12 months earlier. The gross exposure levels were also slightly higher than before at 150. fund NAV compared to 130. fund NAV last year. Average net equity and gross exposure (bubble size represents strategy AUM relative to industry) Average gross exposure Average net equity exposure Jun'09 Jun'10 NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

26 TRADING ACTIVIY Portfolio trading activity increased amongst most other strategies but in the multi-strategy discipline there was a decrease in trading activity. There was a significant increase in the assets for which it was indicated that the portfolio was turned between zero and two times fund capital in a 12-month period: from 15.4% to 64.7%. This was also the case for portfolios turned more than four times to six times fund capital, with assets represented by these funds increasing from 4.1% to 16. over the year. Trading activity % % 43.4% 52.1% % 16.9% % 3.5% % 1.5% 2.4% X fund NAV 2X - 4X fund NAV 4X - 6X fund NAV 6X - 8X fund NAV 8X - 10X fund NAV > 10x fund NAV LIQUIDITY PROFILE OF UNDERLYING ASSETS The majority of multi-strategy hedge fund assets continued to be invested in perceived liquid counters, with participants indicating that 92.7% of strategy assets could be liquidated within 30 days. Portfolio liquidity profile % % 25.5% 22.4% % % 12.5% 9.9% 10.6% 7.6% 4.1% 5.7% % 2.6% day 2-5 days 6-10 days days days days > 90 days NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

27 HEDGE FUND OPERATIONAL ASPECTS In this year s survey a greater emphasis was placed not only on whether operational functions were outsourced or performed in-house, but also on the concentration of assets with any particular service provider. FUND AUDIT Almost all (99.9%) of local hedge funds were audited on an annual basis with the only fund that was not audited having no external investors. The largest four auditing firms in South Africa were responsible for auditing funds managing 81.3% of industry assets. Hedge fund auditor % of funds 26.2% 16.8% 24.3% 9.3% 22.4% 0.9% % AUM 24.4% 26.2% 17.5% % Auditor 1 Auditor 2 Auditor 3 Auditor 4 All other auditors No auditor CLIENT ADMINISTRATION An increasing number of local hedge funds outsourced the client administration function with nearly half of industry assets making use of the same service provider for client administration. Client administration % of funds 43.9% 30.8% 3.7% 1.9% % % AUM % 5.1% % 0.2% Client administrator 1 Client administrator 2 Client administrator 3 Client administrator 4 Other In-house NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

28 FUND VALUATION More hedge funds have opted to solely use an external service provider for fund valuation as opposed to duplicating the function and performing it both in-house and by an external third party service provider. A total of 81.9% of industry assets used solely an external administrator (compared to 65.1% in 2012), a further 17.3% performed this function both internally as well as externally (34.6% in 2012) with no fund performing fund valuation only internally. Fund valuation % of funds 49.5% 29.9% 1.9% 18.7% % AUM 56.1% 26.6% % Administrator 1 Administrator 2 Administrator 3 All other administrators RISK MONITORING There was roughly an equal split between funds opting to outsource the function of risk monitoring, doing this internally or having a combined in-house and outsourced arrangement. Furthermore, some prime brokers also performed some form of risk monitoring. Risk monitoring services provider % AUM 42.9% 7.4% % % of funds 38.3% 10.3% 7.5% External service provider 1 External service provider 2 Prime broker Other In-house NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

29 PRIME BROKER Over the year an increasing number of funds were using a second prime broker. The majority of these funds were fixed income hedge funds. The same number of funds as last year did not use a prime broker. These funds were all housed within large asset managers with an in-house dedicated dealing desk responsible for all the functions that a prime broker would fulfil. Prime broker % 15.6% 11.1% % 2.8% 16.9% % 81.6% 72.1% Yes More than one No CLOSING REMARKS The level of detail and information provided in this survey, albeit in aggregate and anonymous form, is testament not only to the maturity of the local hedge fund industry, but is evidence of an industry showing an above-average willingness to be open and transparent with investors, regulators and the public. Most hedge fund discussions in the current year will undoubtedly be around performance, fees and regulatory reform, both at product level and in terms of taxation treatment. Whether it is these factors, or increased international appetite for Africa and South African hedge fund products, it remains to be seen what might serve as the catalyst for the local industry to become as representative in assets under management size as it is in talent. NOVARE INVESTMENTS. SOUTH AFRICAN HEDGE FUND SURVEY

30 D I S C L A I M E R 1 This survey report is for the use of Novare Investments (Pty) Ltd and its clients and is subject to copyright. Copyright in this document created by Novare Investments will remain vested in us. It may not be reproduced in total or in part nor published externally without prior written consent of Novare Investments (marina@novare.com). 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 (Pty) Ltd 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 expense relating to or arising out of or in connection with the reliance by anyone on the contents of this document. This document is for information purposes only and is not intended for the solicitation of new business nor is it an offer made by Novare Investments. This document does not constitute an offer to buy or a solicitation of an offer to buy or sell units in any jurisdiction in which an offer or solicitation is not authorised or to any person to whom it is unlawful to make such an offer of solicitation. Novare Investments does not purport to act as an advisor or in any fiduciary capacity, nor does it undertake to update, modify or amend the information on a frequent basis. The information contained in this document does not constitute an investment recommendation or rendering of advice. Hedge funds are unregulated financial products and do not comply with the provisions of the Collective Investment Schemes Control Act 45 of The Financial Services Board has not registered any hedge funds as officially approved investment vehicles. Past performance is not indicative of future returns which may go up or down. No guarantees are provided in relation to investment performance. Novare Investments (Pty) Ltd is an Authorised Financial Services Provider in terms of the Financial Advisory and Intermediary Services Act No 37 of FSP No. 757 Novare Investments (Pty) Ltd Third Floor, The Cliffs Office Block 1 Niagara Way Tyger Falls Carl Cronje Drive Bellville 7530 South Africa P O Box 4742 Tyger Valley 7536 South Africa Tel: +27 (0) Fax: + 27 (0) marina@novare.com Authorised Financial Services Provider: 757