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“I think that it would be arrogant for anyone in the industry to say that they have nothing to learn from this blow up” |
By the start of last month it was official: the biggest collapse of a South African hedge fund had occurred. Evercrest Capital’s Evercrest Aggressive hedge fund, managed by Marc van Veen, lost 66% of its R200 million ($28.2 million) assets when it went short on Sanlam, a local insurer, betting that its shares would fall. Instead they went up by 17% in April. Local media speculate that a relatively high leverage level of five times compared with an industry average of two inspired the dramatic losses, although the exact level cannot be confirmed. However as the dust settles on Evercrest, which will be shut after just two years’ operation, questions are being asked as to how such losses can be avoided.
Hot on the heels of Evercrest’s blow-up, the Financial Services Board in South Africa is expected to release regulations for hedge fund managers. Combined with this, the Group of Eight finance ministers met last month to discuss a voluntary code of conduct to help guard against the systemic risk that hedge funds pose.
But the jury is still out. “I often argue with the FSB about systemic risk – they worry that it will lead to market instability such as a bear squeeze but I think there is nothing wrong with that. Every so often you need to sort the men out from the boys,” says Ian Hamilton, CEO of Investment Data Services, a South African hedge fund administrator.
Unsurprisingly, some people disagree. “I think that it would be arrogant for anyone in the industry to say that they have nothing to learn from this blow up,” says Ram Barkai, the CEO of Cadiz, Evercrest’s prime broker. “We must all review our services and processes and see what we have learnt, and what we can do better.”
It could be argued that the prime brokers should have more information on the transactions that hedge funds execute. But Barkai says: “We offer a service to the hedge fund managers – we are not a regulatory body and therefore do not have access to all the moves a fund manager makes. We are appointed by the fund manager. However, we are now focusing on ways to help the fund managers. We are looking at expanding our services, and offering more and better information to stop fund managers finding themselves in the middle of a minefield with no way to go back.”
All market players Euromoney spoke to are agreed on one thing. “We mustn’t jump in and start over-regulating the hedge fund industry – it would kill it in South Africa just as it is starting to grow,” says one. And Carl Liebenberg, chief executive of Clade Investment Management, a South African asset manager that had invested with Evercrest, feels that Evercrest is an exceptional case.
Although the South African hedge fund industry is much more underdeveloped than the US or UK markets, rules and regulations are in place. However, as Hamilton says: “Regulation will not protect an investor from a fund manager that makes a bad decision. Van Veen made a bad decision.”
The South African hedge fund industry is worth about R20 billion, a tiny business compared with the country’s unit trust industry, which is worth R600 billion. To date 90 single-strategy funds and roughly 30 funds of funds are active in the market. But Hamilton is quick to mention that Evercrest isn’t the first hedge fund to go belly up in South Africa: “Other small funds have lost proportionately as much as Evercrest, it is all a matter of fund size,” he says. However, he adds: “Hedge funds are opening and closing all the time and I think the fact that the Evercrest blow-up is more public shows that the industry is more visible here than it was a few years ago.”
Despite repeated attempts, Euromoney was unable to contact Evercrest and van Veen.
