South African Disbursement of Hedge Funds
In South Africa, a mature and sophisticated market across Africa, the distribution of foreign hedge funds is regulated to ensure robust institutions and a quality legal and regulatory system. This conservative regulatory environment primarily caters to hedging and portfolio management purposes.
The South African market for hedge funds is segmented into two main types: Retail and Restricted hedge funds. Retail hedge funds allow both retail and institutional investors, but with more restrictive prescriptions. On the other hand, Restricted hedge funds are not offered nor solicited to the wider public, and only qualified investors can participate in these structures with minimum investment amounts reflective of this restriction.
Foreign fund managers seeking to access the South African fund distribution market after the 2015 regulations must comply with the Financial Sector Conduct Authority’s (FSCA) requirements. These include registering or partnering with local entities that are FSCA-approved Financial Service Providers (FSPs) to distribute funds in South Africa.
Foreign funds must also conduct client due diligence (CDD), ensure anti-money laundering (AML) measures, and comply with FATCA and CRS reporting as part of local requirements for foreign funds distributing in the SA market. Furthermore, they need to fulfill fund administration and transfer agency services that meet the FSCA’s Conduct Standard 2 of 2020, which governs CIS service providers, ensuring transparency and investor protection.
Compliance with the South African Securities Services Act (SFA) is also mandatory, which generally allows offers and sales only to “relevant persons,” often defined as accredited or institutional investors, limiting public distribution.
European domiciles like Luxembourg and Ireland have never posed a problem in this regard. The South African Collective Investment Scheme Supervisory and Control Act (CISCA) contains principles for recognizing foreign funds, and foreign fund distribution in South Africa typically mirrors the one of the home state domicile.
Foreign fund managers need to have a representative agreement with a local management company for approval. CISCA implementing notices contain a specific reference to UCITS compliant schemes and their perception in the South African regulatory environment. The introduction of regulations on hedge funds may allow for more complex foreign funds to enter the South African fund distribution market.
The fund distribution market in South Africa is concentrated, with a handful of players in every sector governing the relevant fund distribution channels. This regulatory landscape necessitates foreign hedge fund managers to engage local, FSCA-approved intermediaries to access South African investors.
Investors looking to participate in South African Retail hedge funds must abide by more restrictive prescriptions compared to institutional investors. Foreign fund managers, to distribute their funds in South Africa, must partner with local entities that are Financial Service Providers approved by the Financial Sector Conduct Authority, and also comply with local requirements such as client due diligence, anti-money laundering measures, FATCA and CRS reporting, and adherence to the South African Securities Services Act. This necessity for local partnerships demonstrates the need for foreign hedge fund managers to collaborate with local, FSCA-approved intermediaries to access South African investors.
