Whatever Happened to Hedge Funds?

• Author: Lumen Moolman,Adriaan Booysen
• DOI: 10.10520/ejc-btclq_v13_n3_a4
• Published date: 01 September 2022
• Date: 01 September 2022
• Pages: 15-26

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Whatever Happened to Hedge



LUMEN MOOLMAN*†

ABSTRACT

South African hedge funds were declared as ‘Collective Investment Schemes’

(‘CIS’), and accordingly regulated under the Collective Investment Schemes

Control Act (‘CISCA’), in 2015. The inclusion of hedge funds in the regula-

tory sphere of CISCA was intended to provide protection to investors and

the f‌inancial system, whilst affording greater access to hedge funds for retail

investors, which were previously reserved for the most sophisticated, daring

and well-connected investors.

This article investigates the characteristics and methodologies of hedge

funds and their typical structure in South Africa, as well as the evolution of

the regulatory landscape of the South African hedge fund industry. This is

followed by a summary of the relevant income tax and capital gains tax provi-

sions that currently apply to hedge funds, and the importance of correctly

classifying amounts as either capital or revenue in nature. The current state

and climate of the South African hedge fund market is further explored in

order to determine whether the regulation of hedge funds under CISCA has

provided the intended protection to investors and South Africa’s f‌inancial

system, whilst developing f‌inancial markets, without unreasonably or exces-

sively constraining the business of hedge funds.

Since 2015, the number of registered hedge fund CISs and portfolios

has been declining, whilst the value of assets under management has been

steadily increasing. The authors submit that this inverse relationship is indica-

tive of the fact that despite the relative health of South Africa’s hedge fund

industry, there are signif‌icant barriers to the establishment of new hedge fund

CISs and portfolios. With onerous prescriptions, limitations and requirements,

South African hedge funds are now among the most extensively regulated

in the world and the protection afforded to investors, whilst effective, may

be slowly strangling the sustainable growth of South Africa’s hedge fund

industry.

Introduction

For many years hedge funds have been widely considered to be one of the

most complex, risky and expensive alternative investment classes acces-

sible only to the most sophisticated, daring and well-connected investors.

That was all supposed to change in South Africa on 25 February 20151

when then Minister of Finance Nhlanhla Nene declared South African

1

* Partner, Webber Wentzel.

† Senior Assoiciate, Webber Wentzel.

Government Gazette 38503 dated 25 February 2015.