How are hedge funds classified?

The Association for Savings and Investment South Africa (ASISA) introduced a classification standard for hedge funds in South Africa from January 2020.

This makes it easier for you to assess and compare funds and to select hedge funds appropriate for your risk profile and investment portfolios.

The classification standard has four tiers.

Tier one

In this tier funds are classified as either:

• Retail hedge funds; or
• Qualified investor hedge funds.

Tier two

The second tier classifies hedge fund portfolios according to their geographic exposure:

• South African portfolios: invest at least 55% of their assets in South African investment markets.
  
  
• Worldwide portfolios: invest in both South African and foreign markets with no limits set for either domestic or foreign assets.
  
  
• Global portfolios: invest at least 80% of their assets outside South Africa, with no restriction to assets of a specific geographical country, for example the US, or a geographical region, like Africa.
  
  
• Regional portfolios: invest at least 80% of their assets in a specific country, for example the US, or a geographical region, such as Africa excluding South Africa. 

Tier three

The third tier of classification is based on the manager’s investment strategy:

• Long Short Equity Hedge Funds: these funds generate their returns mostly from positions in the equity market.
  
  
• Fixed Income Hedge Funds: these funds invest in instruments and derivatives that are sensitive to movements in the interest rate market.
  
  
• Multi-Strategy Hedge Funds: these funds blend a variety of different strategies and asset classes with no single asset class dominating over time.
  
  
• Other Hedge Funds: these funds use strategies that do not fit into any of the other classification groupings.

Tier four

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: these funds will over time aim for an effective exposure to shares (after the long and short positions offset one another) in excess of 25% of the fund.
  
  
• Market Neutral Hedge Funds: these funds are expected to deliver returns that are not linked to the swings in the market and are not correlated with any individual stock. Over time, their effective average exposure to shares (after the long and short positions offset one another) should be less than 25% of the fund but greater than minus 25%.
  
  
• Other Equity Hedge Funds: these funds follow a very specific strategy within the equity market such as investing in listed property.

When there are five or more hedge fund portfolios in either the qualified investor hedge fund or retail investor hedge fund, categories with similar objectives and investment policies, ASISA will consider adding a new category.